EC Questions German Depreciation Provisions

by Ulrika Lomas, Tax-News.com, Brussels

18 September 2009

The European Commission has referred Germany to the European Court of Justice for restricting decreasing balance depreciation for wear and tear under Paragraph 7(5) of the German Law on Income Tax (Einkommensteuergesetz) to buildings located in Germany. The Commission considers that Germany has failed to fulfill its obligations under Article 56 of the EC Treaty.

The present action by the Commission concerns the provisions under the German Law whereby the "decreasing balance depreciation for wear and tear" – that is, the use of depreciation rates higher than those used for straight-line depreciation during the early stages of the depreciation period – which is provided for in the fiscal treatment of immovable property is restricted to buildings located in Germany.

This difference in the treatment of immovable property located in and outside Germany is, it is claimed, contrary to the free movement of capital guaranteed under Article 56. According to settled case-law, Article 56 prohibits all measures which treat cross-border capital movements less favorably than wholly internal capital movements, thereby deterring residents from engaging in the former.

In consequence of the provision at issue, the cashflow situation of an investor who is liable to tax is less favorable in the case of a foreign property than in the case of a property in Germany. According to the case-law, the improved cashflow in the case of an investment in property in Germany amounts to a tax advantage which must be taken into account when comparing the treatment of wholly internal and cross-border situations.

Although the operation of the discriminatory provision being challenged in this case has been limited to buildings in respect of which an application for a building permit was made or a purchase contract concluded before January 1, 2006, the Commission’s court application notes that this does not eliminate the restriction on the free movement of capital, since decreasing balance depreciation for wear and tear is ongoing.

Recommended