German States Divided Over Property Tax Reform

by Ulrika Lomas, Tax-News.com, Brussels

13 September 2010

Although Germany’s federal states have been calling for a reform of local property tax for years now, state finance ministers failed to unite on plans for reform during a recent meeting, preferring instead to await evaluation of the proposed models by a working group.

Federal states in southern Germany (Bavaria, Hesse and Baden-Württemberg) support the idea of introducing a simple property tax (eine Einfach-Grundsteuer), based on the area of the site and the building and taking into account floor height. Arable land would not be taxed under the proposal.

Nevertheless, the majority of states remain opposed to this model, favouring instead the introduction of a tax based on the market value of a property, which also takes into account both the location and the condition of the property. Assessing the current market value of properties in Germany could, however, prove extremely costly for the administration.

Pressure on the states to reach a consensus on reform is mounting. In August, Germany’s Federal Fiscal Court (der Bundesfinanzhof – BFH) emphasized the need for an urgent reform of local property tax in Germany on the basis of constitutional objections to current practice.

In its ruling, the court found it unacceptable that both developed and undeveloped property continues to be taxed in Germany according to obsolete values dating from the last century. Failure to reform property tax, it warned, would lead to violation of the principle of equality contained in the country’s basic law.

Property tax in Germany is currently levied by local authorities and is a reliable source of revenue for towns and cities, generating more than EUR12bn every year. Currently, property tax is calculated according to unit values from 1964 in the case of old, former West German states and West Berlin and from as far back as 1935 in the case of new states in former East Germany and East Berlin. According to the court, however, such different treatment can no longer be justified by transitional difficulties arising from German reunification.

A decision regarding a model for reform is expected in the spring of 2011, and a bill is expected in 2012.

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