Income from real estate is taxable in the country in which the real estate is located – an undisputed international principle which naturally applies in Germany. Due to the division in Germany of direct taxation into corporate income tax and trade tax, the overall direct tax burden from a real estate investment is much more flexible than expected, especially for corporate investors. Where corporate income tax (up to 45% for individual investors and 15% flat for corporate investors – neither of which includes German surcharges) is a fixed-cost driver, trade tax (7.5% to 31.5%, depending on municipality, and which is to a certain extent creditable against the income tax of individual investors) may apply only where income derived from German real estate qualifies as trade income rather than income from property administration.

On July 14 2016 the Federal Fiscal Court (IV R 34/13) clarified disputed issues on whether the lease of a shopping centre qualifies as trade income or income from property administration.


The decision involved a German limited partnership that in 1996 acquired approximately 100,000 square metres of arable land on which it built a shopping centre. The shopping area covered approximately 30,000 square metres and was leased out to approximately 40 retail and service industry tenants.

Apart from their lease contracts with the limited partnership, the tenants were obliged to enter into contracts with a property manager held by the general partner of the limited partnership covering the ongoing operation, maintenance, cleaning and security of the shopping centre, as well as parking spaces. Further, in accordance with the lease contracts, the tenants had to enter into a civil law association to identify, plan and execute advertising for the shopping centre. The advertising association was led by a so-called 'centre manager' that was also a fully owned subsidiary of the general partner of the limited partnership.

Relevant to the case were the tax assessment periods from 1998 to 2002, in which the limited partnership declared rental income only and hence filed no trade tax returns. In the course of a subsequent tax audit covering all relevant years, the tax auditors concluded that the contractual interrelations had led to the limited partnership deriving trade income, not property administration income. The limited partnership's local tax office followed this opinion and released new tax assessment notices stating the trade income derived by the limited partnership. Since an appeal against these assessments proved unsuccessful, the limited partnership applied to the Lower Saxony Fiscal Court which, however, denied the claim. On June 26 2013 (7 K 10056/09), the first-instance court held, among other things, that:

  • the conclusion of interrelated contracts between the landlord, centre manager and property manager, as well as the respective tenants in an advertising association, constituted a uniform trade business allocable to the landlord; and
  • the other services rendered (eg, security of shopping centre and parking spaces, cleaning of public sanitary installations and social areas, as well as equipment and supplies) each constituted so-called 'special services', which are detrimental for the assumption of income from property administration.

The tax authorities and the first-instance court denied the claim, so the limited partnership appealed to the Federal Fiscal Court.

According to the Federal Fiscal Court decision, neither the operating services provided by the property manager nor the advertising measures taken by the centre manager and the advertising association led to a reclassification of the rental income as trade income at the level of the limited partnership.

The decisive criteria for the distinction between detrimental and not detrimental services lie in the determination of whether such services – in a generally accepted view and based on an object-related assessment – do not exceed a common standard required by tenants to commercially utilise leased spaces and are not considered a separate approach by a landlord.

In this case, the court emphasised that from a customer perspective, a shopping centre constitutes more than a mere agglomeration of shops:

  • A shopping centre usually creates an entertaining or informative programme with uniform advertising measures, in an environment where customers can generally access the different shops easily on foot without restrictions during regular shopping hours. Hence, measures taken to create such a shopping environment – including the implementation of a uniform advertising strategy – do not constitute detrimental services. Rather, they are performed in order to create a locational advantage and a special attractiveness to encourage customers to remain within the shopping complex.
  • The lease of spaces in a shopping centre requires certain minimum infrastructure consisting of parking spaces, storage rooms, access protection, sanitary installations and staff rooms. The maintenance of this minimum infrastructure may therefore not be assumed as detrimental services.
  • Watch keeping or security with regard to the shopping centre as a whole (not individual shops) is performed by the landlord in its own interest, in order to avoid property damage by third parties.

Consequently, the court did not assume the limited partnership rental income to be trade income. Rather, taking into account the size and purpose of the leased shopping centre (object-related assessment), the services rendered did not exceed the threshold of being regarded as unusual. Instead, they were assumed to be mere ancillary services to the leasing of real property and did not therefore constitute a threat to the rental income being qualified as income from property administration.


With regard to mere ancillary services (eg, security and cleaning), the decision is unsurprising. That the first-instance court regarded such services as detrimental for the assumption of income from property administration was contrary to tax literature and practice. Fortunately, the dispute about this issue has been clearly resolved in the final instance.

Surprisingly, the Federal Fiscal Court also decided that marketing measures conducted by a centre manager are not detrimental for trade tax purposes, giving real estate investors much more flexibility for existing and future real estate investments in terms of ring-fencing trade tax exposures.

However, the Federal Fiscal Court decision should not be considered a free lunch, since it is based on a strict object-related assessment and therefore constitutes a case-by-case decision. The court implicitly stressed that the scale of the shopping centre led to the services provided being regarded as mere ancillary services to the rental of shopping spaces. Larger-scale real estate investments may consequently benefit directly from this decision, while smaller investments should be re-assessed on a case-by-case basis in light of the court's arguments and all facts and circumstances.

In the end, trade tax optimisation remains the key to controling the overall direct tax burden of an investment in German real estate. The market provides for various structuring approaches in that regard (eg, via foreign entities, domestic entities and utilisation of the extended trade tax deduction in accordance with Section 9(2)(2) of the Trade Tax Act and via trade tax exempt investment funds). Another option is to structure the investment on the basis of a German partnership that does not derive trade income. The decision may lead to the latter option becoming more popular in future tax-structuring practice.

For further information on this topic please contact Peter Scheuch at Noerr LLP by telephone (+49 351 816 6061) or email ([email protected]). The Noerr LLP website can be accessed at