Level playing field High court overturns German property tax regime

The ruling affects 35 million properties and requires lawmakers to put a new system in place by 2024.
Taxman goes back to the drawing board.

Germany’s highest court ruled Tuesday that the country’s property tax regime is unconstitutional because it is based on different unit values in different regions. The Constitutional Court in Karlsruhe said a new scheme must be devised by 2019 and go into effect by 2024.

The ruling was expected, but it upends a complex system of taxation that affects some 35 million properties, billions in tax revenues and hundreds of jobs. Finding a new model for taxation pits renters against owners, municipalities against taxpayers, and everyone against real estate lobbyists.

The nub of the problem as decided by the court is that property taxes in the former East Germany are based on unit values dating to 1935, while those in the old West Germany go back to values established in 1964. Moreover, neither has been updated in the intervening years despite wildly divergent increases in property prices. The unit values are unequal to begin with and no longer reflect the actual market.

Cities will not let this chance to improve their budget situation go unused. Matthias Wagner, real estate expert, Simmons & Simmons

The current system, in short, is unfair and obsolete. But industry groups warn that even the simplest solutions will require vast amounts of new data regarding land surfaces and building size. Fearing an increase in rents, renters are arguing that property taxes should be the exclusive concern of the owners and not levied as an additional fee on renters, as is now the case.

The long transition period is designed to give municipalities, which derive most of their revenue from the property tax, time to adjust their budgets. But these local governments will be looking for ways to increase their income. “The cities and communities presumably will not let this chance to improve their budget situation go unused,” commented Matthias Wagner, real estate expert at the Simmons & Simmons law firm.

German property taxes are relatively low. The average tax for a private household is only €200, while in the US it is not uncommon for property tax to exceed $10,000. Revenue from property tax in Germany is expected to be €14.3 billion in 2018, or just 0.4 percent of GDP. In Britain, property taxes represent 3.1 percent of GDP.

Reform of the property tax also offers the opportunity to achieve other policy objectives. Levying the same tax on property whether it is developed or undeveloped, for instance, would make it prohibitively expensive to leave urban properties undeveloped – a major complaint for cities where speculators buy up land just to flip it.

Handelsblatt reporters Martin Greive, Donata Riedel and Reiner Reichel contributed to this story. Darrell Delamaide adapted it into English for Handelsblatt Global. To contact the authors: [email protected], [email protected], and [email protected].