Proportionate property tax relief for landlords and real property whose preservation is in the public interest

Taxpayers suffering direct and not inconsiderable economic damage as a result of the COVID-19 crisis have been promised numerous tax reliefs. Under certain conditions, relief is also available in the area of property tax.

The COVID-19 pandemic and the associated containment measures have led to liquidity bottlenecks in almost all sectors of the economy. As a result of the reduced earnings situation, many tenants were no longer able to pay rents due, or were only able to do so with delay. New lease agreements were not concluded or were postponed due to the uncertain further course of the pandemic. Frequently, the landlord, as the owner of the respective leased property, then asks himself how he, for his part, can counteract any damage arising in this way.

It would be conceivable to relieve the burden on real estate owners via the real estate tax. Sections 32 and 33 of the German Real Estate Tax Act (Grundsteuergesetz – GrStG) provide for a waiver of real estate tax in the event of a significant reduction in income. The prerequisites for a successful application for a waiver are that (i) the normal gross income of a developed property is reduced by more than 50% and (ii) the debtor of the property tax is not responsible for this. Thus, the real estate tax abatement is mainly applicable to buildings intended for renting and which are completely or partially vacant or suffer a substantial loss of rent. Undeveloped properties are not covered by the regulation.

(i) The normal gross income shall be determined on the basis of the annual gross rent within the meaning of § 79 Valuation Act (Bewertungsgesetz – BewG). Annual gross rent is the total remuneration which the tenants (leaseholders) have to pay for the use of the land on the basis of contractual agreements for one year. If the real property or parts thereof are owner-occupied, unused (i.e. also vacant), for temporary use or provided free of charge, the annual gross rent shall be the usual rent to be estimated on the basis of the annual gross rent regularly payable for premises of the same or similar type, location and equipment.

(ii) A further prerequisite for a successful application for remission is that the tax debtor is not responsible for the significant reduction in income. According to the applicable case law of the Federal Administrative Court (Bundesverwaltungsgericht – BVerwG) (ruling of 14 May 2014 – 9 C 1.13), the taxpayer is not responsible for a reduction in income "if it is based on circumstances that are beyond his control, i.e. if he neither brought about the reduction in income through conduct attributable to him nor could have prevented its occurrence through suitable and reasonable measures". Furthermore, according to the case law of the Federal Fiscal Court (Bundesfinanzhof – BFH) (ruling of 24 October 2007 - II R 5/05), the taxpayer is not responsible for a "reduction in income caused by vacancy if the taxpayer has made a sustained effort to rent out the property at a fair market rent". In contrast, according to the BFH (ruling of 17 December 2014 – II R 41/12), the taxpayer is responsible for a reduction in income if "the (partial) vacancy of a building is based on the taxpayer's decision not to initially offer the apartments therein for rent and to fundamentally renovate or refurbish them before re-letting them".

Vacancies (e.g., due to terminations, contract cancellations or lost new leases) and unpaid, late or undue rent payments (e.g., due to a rent adjustment pursuant to Section 313 (1) of the German Civil Code (Bürgerliches Gesetzbuch – BGB)) arising from or in connection with the COVID-19 pandemic and the resulting reduction in a landlord's income are based on circumstances for which the landlord is not responsible. In this respect, a property tax waiver may be considered in these cases.

If both of the above criteria are met, the amount of property tax to be remitted must be checked. If there is a reduction in income of more than 50%, the property tax is waived in the amount of 25%. If, on the other hand, the reduction in income is 100% of the normal gross income, 50% of the property tax is waived. A corresponding application must be submitted to the municipality by 31 March of the following year. Only the person to whom the property is attributed on January 1 of the waiver period is entitled to apply. The application does not have to be submitted again each year. Rather, the tax debtor is obliged to report a change in circumstances within three months of the occurrence of the change.

According to the BFH (ruling of 24 October 2007 – II R 5/05), the scope of a property tax waiver is not limited to atypical and temporary reductions in income. Rather, a property tax waiver can also be considered in the case of structurally caused (permanent) reductions in income. Consequently, in many insolvency proceedings in which vacant real estate is part of the insolvency estate, the property tax can be waived at the request of the insolvency administrator, thus avoiding a further burden on the insolvency estate.

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