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Germany’s new market for real estate investment trusts (REITs) should emerge as planned from January 2006, despite fresh worries over tax issues related to the introduction of REITs, German real estate experts say.
“I have good contacts at the federal finance
ministry. And from what I am told, there is still at least a 75% chance that REITs will be launched early next year,” said Thomas Busching,
international partner at the Frankfurt law firm Haarmann Hemmelrath.
To settle the tax issues, the chief barrier to
creating German REITs, finance officials from the federal and state governments created a special taskforce last January.
Until recently, it appeared that the taskforce was making progress. For example, it agreed that the tax rate for the creation of REITs from property should be 20%, or half the current 40% rate applied to earnings on commercial
property sales.
However, this progress was cast into doubt last month by Karl Diller, deputy finance minister. Diller said in an interview that it was “an uphill struggle” in convincing lawmakers that REITs would not cause any tax shortfalls, adding that, hence, the launch of REITs might be postponed.
Real estate sources in Frankfurt say the main sticking point now is the level of capital gains tax for foreign investors. France charges foreign investors in its REITs a reduced tax of 10% to avoid the effect of double taxation.
But some in the taskforce are calling for a capital gains tax of twice that to guard against tax shortfalls. In the eyes of foreign investors, such a rate might harm the attractiveness of German REITs vis à vis those in France and the UK, which is set to create its own REIT market in mid-2006.
For that reason, Busching does not expect
German lawmakers to set the rate at 20%. “Yet if they do, even that will, on some level, be acceptable,” he said.
Heiko Beck, chief counsel at German real estate fund provider DekaBank, agrees: “Provided that the tax rate is not too high, German REITs will be attractive because of the enormity of the country’s property industry.”
Moreover, the financial community lobby IFD dismisses lawmakers’ concerns about tax shortfalls. It estimates that in the long term, governments would actually collect e8.2bn in additional revenue due to the invigorating effect REITs would have on the German real estate market. That market, according to IFD, has the potential to grow to e127bn by 2010.

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