New German real estate tax: tax authorities allow proof of lower market values in the so-called federal model

In summary

Pursuant to rulings by the German Federal Fiscal Court (BFH), the constitutional prohibition of excessiveness is violated at least if the flat-rate assessed real estate tax value exceeds the proven lower fair market value by 40% or more.

Thus, if the real estate tax value multiplied by 0.714 is greater than the fair market value, the fair market value may be applied. This condition is also adopted by the current federal state decrees. It is not clear from the current federal state decrees whether the principles of the BFH rulings relating to real estate are also applicable to agricultural and forestry businesses. Details, in particular on the requirements for proving the fair market value, are provided below under the respective headings.

The BFH-rulings

With regard to the so-called federal model for the new German real estate tax, the BFH granted a suspension of enforcement of the real estate tax assessment notice in two cases in its rulings dated 27.05.2024. A summary examination at least did not rule out the possibility that the applicants could successfully provide evidence of a lower fair market value of their land with the necessary deviation from the established real estate tax values due to the particularities of the individual cases (see our Insight dated 14.06.2024).

The reaction of the tax authorities

The tax authorities reacted surprisingly quickly to these resolutions with coordinated state decrees dated 24.06.2024. Equitable measures are generally excluded when determining real estate tax values. However, to the extent that the flat-rate real estate tax value determination violates the constitutional prohibition of excessive measures in individual cases, the valuation regulations applied must be interpreted in accordance with the constitution. For this reason, the tax authorities allow proof of a lower fair market value for the so-called federal model under certain, narrowly defined conditions and thus also a corresponding suspension of enforcement of the real estate tax assessment notice based on flat-rate values.

Does the 40% limit only apply to real estate assets or also to agricultural and forestry businesses?

The BFH rulings apply to real estate. On the one hand, the current state decrees refer to the “Seventh Section of Part Two of the Valuation Act” or a “difference between the real estate tax value determined pursuant to Sections 218 et seq. German Valuation Act (BewG) and the fair market value”, and on the other hand ‘real estate assets’. The former includes agricultural and forestry businesses, the latter does not. Since a constitutional interpretation encompasses all types of assets, a restriction of the 40% limit to land assets does not appear to be expedient.

Requirements for proof

However, it is not sufficient to merely state the lower value; the taxpayer must also provide documentary evidence of this. This can be done by means of an expert opinion from the relevant expert committee or a publicly appointed and sworn or correspondingly accredited expert for the valuation of developed and undeveloped properties. A purchase price that was realized in the ordinary course of business within one year before or after the main assessment date can also serve as evidence. In this respect, the condition is that the relevant circumstances of the economic unit at the time of acquisition are unchanged compared to the circumstances at the time of the main assessment.

Correction also possible without objection

In cases where the real estate tax value exceeds the proven fair market value by at least 40 %, but no objection has been lodged against the assessment and it has therefore become final, a correction may be possible as part of the error-removing value update. For this purpose, the value adjustment limit of EUR 15,000 must be exceeded.

Suspension of the enforcement of real estate tax assessments

Finally, in view of the above-mentioned decisions of the BFH, applications for the suspension of the enforcement of contested real estate tax assessments must also be granted with immediate effect. In this respect, however, it must be conclusively demonstrated that the 40 % limit is reached. Although a market value appraisal does not have to be submitted at the time of the application, it must be submitted within a reasonable period set by the tax office. “Subject to other findings”, 50% of the real estate tax value should be suspended from enforcement as a rule.

Outlook

On a political level, consideration is also being given to including the possibility of proving a lower market value for the purposes of real estate tax in Section 220 BewG as part of the ongoing legislative process for the Annual Tax Act 2024. The amendment to the law would then be of a clarifying nature in the opinion of the administration. In this respect, however, further developments remain to be seen.