When it comes to cross-border real estate investments, it may be advantageous to invest in the respective jurisdiction via a local investment fund instead of a traditional real estate company. Tax advantages abroad are often associated therewith. The Federal Financial Supervisory Authority has now issued a statement on whether the characteristic as an investment fund speaks against a simultaneous classification as a real estate company. Its unequivocal answer: there is no specialty of classification. Both classifications are possible at the same time. This is the most important statement of the draft letter and it is phrased briefly and to the point. The Federal Financial Supervisory Authority then deals extensively with the requirements for the classification as a real estate company.

Exiting a German inbound structure via a sale of shares in a German corporation subjects the non-resident seller to a capital gains tax under German domestic law. If, however, the seller is a corporation, it will benefit from the domestic participation exemption privilege. Unlike the tax situation of a German corporate seller, the non-resident corporate seller will not suffer a 5 per cent add-back – the German Federal Tax Court held that the non-resident corporate seller will benefit from a 100 per cent tax exemption.

We previously informed you about a lower German tax court decision on distributions made from previously taxed deemed dividends pursuant to the German CFC rules (see beleuchtet dated 18 May 2016). In contrast to the view of the German tax authorities, the Tax Court of Bremen ruled on October 15, 2016, that such distributions made from previously taxed deemed dividends pursuant to the German CFC rules will have to be treated as tax-exempt income for corporate investors according to paragraph 3 no. 41 of the German Income Tax Act. Paragraph 8b section 5 of the German Corporate Tax Act does not apply so that double taxation can be avoided. The German Supreme Court now overruled the decision of the lower Tax Court of Bremen and followed the German tax authorities' view: 5% of such distributions made from previously taxed deemed dividends pursuant to the German CFC rules are subject to corporate income tax.