Hidden and thus previously untaxed reserves can be included in company real estate. Often, the acquisition or fabrication took place decades ago, buildings have been amortised and subsequent value increases in real estate lead to current market values diverging significantly from taxable asset values. A sale of this company real estate inevitably leads to a disclosure and therefore taxation of hidden reserves.
If fixed assets are sold German § 6 b ESTG (Income Tax Act) permits the tax-free transfer of hidden reserves. This way economically sensible restructuring is enabled that would fail without this regulation due to the otherwise resulting tax burden.
Mr. Müller possesses a business property with a warehouse in Gronau which was acquired in 1980. The building is completely amortised. The property has a book value of € 20K in the balance sheet at 31.12.2016. In 2017, Mr. Müller sells the property for € 1 million. In the same year, a better located property in Gronau is acquired and developed with a larger, more modern warehouse. The acquisition costs € 2 million, € 1 million as a bank loan, € 1 million is generated by the sale of the old property.
Without § 6 b ESTG, Mr. Müller would have to pay taxes of around € 490K on the capital gain (€ 1 million – € 20K = € 980K) and could not use that amount for re-investment. § 6 b EStG allows him to transfer hidden reserves fully to the new investment, so no tax is due.
There are some conditions: At the time of sale the sold assets must have belonged to a domestic permanent establishment continuously for at least six years and the purchased or fabricated assets have to belong to the fixed assets of a native permanent establishment. This means according to the text of the EStG in the above example, that reinvestment in Germany (here: Gronau) is encouraged, an investment in Enschede (Netherlands) is not encouraged.
This tax regulation is however contrary to European law, since it violates the principle of the freedom of establishment. According to the judgement of the fiscal court of Lower Saxony of 01.12.2011, case number 6 K 435/09, a reinvestment in another country of the EU is also tax-privileged. The Federal Fiscal Court deems the legal situation so clear that it has not granted an appeal (BFH of 20.08.2012, I R 3/12 (NV). The Fiscal Court Munich has confirmed this judgement with its verdict of 7.7.2014 (case no. 5 K 1206/14). This means, you have the opportunity to disclose hidden reserves in Germany and to take these hidden reserves into other EU countries.
The legislator has now reacted with the Tax Reform Act 2015 and created a new section 6b paragraph 2 of the EStG (German Income Tax Act). This regulation permits that with a reinvestment in other EU countries, tax is paid on a sales profit in five equal annual instalments. This represents an improvement compared with the previous legal situation. However, it is highly debatable whether the revision will actually eliminate the European law violation of section 6b of the EStG, as e.g. there is still discrimination against the reinvestment of sales profit generated from property sales in other EU countries. In the EU case, there is a five year instalment payment. Domestically, there is endless tax deferral for land in extreme cases, whereas for buildings in business assets there is tax deferral spread over the term of use of mostly 33 years.
We can tell you how to act in this unclear legal situation.