Latest news on the extended trade tax reduction for real estate companies

The extended trade tax reduction pursuant to section 9(1), second sentence and following of the German Trade Tax Act (Gewerbesteuergesetz ‒ GewStG) plays a major role in the structuring of real estate investments. On the one hand, the extended trade tax reduction can result in considerable tax savings. On the other, the requirements are very strict, which makes the provision complex and prone to dispute. In recent months, several interesting judgments on the application of the extended trade tax reduction have been published. These are summarised below.

A. Overview

The extended trade tax reduction is relevant for limited liability companies and limited partnerships that hold and manage real estate, which are subject to trade tax solely on the basis of their legal form. In order not to disadvantage these entities compared to individuals and asset-managing partnerships, they may reduce, for trade tax purposes, that part of their profit which is attributable to the management and use of their real estate from their trade tax base. The prerequisite is that the entities exclusively manage and use their own real estate or, in addition to their own real estate, their own capital assets (what is known as the “exclusivity requirement”). Ancillary activities will generally cause the entity to lose its entitlement to the extended trade tax reduction and will only be accepted by the Federal Fiscal Court’s (Bundesfinanzhof ‒ BFH) case law within very narrow limits. According to this case law, the ancillary activities must serve the management and use of the entity’s own real estate and be capable of being regarded as an essential and necessary part of a commercially reasonable structure for managing and using that real estate.

There are only very limited exceptions to the exclusivity requirement, of which the following two are particularly relevant in practice:

• 5% de minimis threshold for other income: Other income (for example from letting installations and equipment that serve specific business operations (the “operating equipment”) together with the property) is, by way of exception, not prejudicial if (i) it does not exceed 5% of the income from the letting of the real estate and (ii) it arises from direct contractual relationships with the tenants of the real estate.
• 20% threshold for additional electricity income: Income from the generation of electricity using installations under the Renewable Energy Sources Act (Erneuerbare Energien Gesetz ‒ EEG) (for example photovoltaic systems) or from the operation of charging stations is likewise not prejudicial, provided that (i) such income does not exceed 20% of the income from the letting of the real estate and (ii) the electricity is not supplied to final consumers (with the exception of tenants).

As long as the above-mentioned thresholds are complied with, the non‑real‑estate income is subject to trade tax, but does not put at risk the trade tax exemption of the real estate income.

B. Current case law on prejudicial ancillary activities

I. Irrelevance of the absence of consideration

According to the judgment of the Federal Fiscal Court of 24 July 2025 (case no. III R 23/23), ancillary activities that are not expressly permitted by law are prejudicial to the extended trade tax reduction even if they do not generate any income.

In the case decided, a German limited liability company (Gesellschaft mit beschränkter Haftung), whose corporate object was primarily the management of exclusively its own real estate assets and the holding of other investments, also held two vintage cars as fixed assets. It had acquired the vintage cars as an investment with the intention of making a profit, but the company had not yet generated any income from them. The Federal Fiscal Court refused to apply the extended trade tax reduction on the grounds that holding the vintage cars breached the exclusivity requirement. It did not accept the argument that no income has been generated from holding the vintage cars, stating that activities prejudicial to the extended trade tax reduction are present even if they do not generate any income. In doing so, the Federal Fiscal Court contradicts parts of the academic literature and clarifies a previously disputed legal issue.

In this context, it confirmed its earlier case law, according to which the concept of exclusivity must be understood in qualitative, quantitative and temporal terms alike.

II. Letting of operating equipment together with the property

The letting of operating equipment together with the property is, as a rule, prejudicial to the extended trade tax reduction. Since the 5% de minimis threshold for certain types of property (for example hotels, shopping centres and logistics buildings) is set at a relatively low level, the following judgments handed down in recent months are therefore of the utmost practical relevance.

1. Fiscal Court Berlin-Brandenburg: Trust model prejudicial

According to the judgment of the Fiscal Court Berlin‑Brandenburg dated 8 July 2025 (case no.6 K 6040/22), the “trust model” in relation to the letting of operating equipment is prejudicial to the extended trade tax reduction.

The ruling concerned a structure in which the property-owning entity holds the operating equipment on trust for another company (known as a “FixCo”) and leases it to a tenant. The structure is based on the idea that for tax purposes under section 39 of the German Fiscal Code, the operating equipment is to be attributed to FixCo and that the property‑owning entity therefore does not carry out any prejudicial ancillary activities.

However, the Fiscal Court Berlin‑Brandenburg has now held that the trust activity itself is to be regarded as a prejudicial ancillary activity since it is not included in the list of non‑prejudicial activities laid down by law. The framework drawn by the Federal Fiscal Court for non‑prejudicial ancillary activities – namely those activities that serve the management and use of the entity’s own real estate and can be regarded as an essential and necessary part of a commercially reasonable structure for managing and using that real estate (see section 2) is not complied with. The Fiscal Court Berlin-Brandenburg further stated that, given the manageable number of tenants in the case at hand, it could not be ruled out entirely that the individual tenants of the units could have been approached directly and the landlords of the trust assets, who were also identifiable as such, could have been replaced. In the view of the Fiscal Court, there was therefore, at least in this case, an economically viable alternative to the chosen trust model.

The Fiscal Court Berlin-Brandenburg allowed an appeal to the Federal Fiscal Court (case no. III R 27/25).

2. Federal Fiscal Court: Goods lifts in shopping centre/department stores non-prejudicial

According to two judgments of the Federal Fiscal Court of 25 September 2025, the letting of a goods lift in a shopping centre (case no. IV R 9/24) and in a department store (case no. IV R 31/23) together with the property is not prejudicial to the extended trade tax reduction.

Under the settled case law of the Federal Fiscal Court, the letting of operating equipment together with the property is, by way of exception, not prejudicial to the extended trade tax reduction if:

• in qualitative terms, it serves the management and use of the entity’s own real estate and can be regarded as an essential and necessary part of a commercially reasonable structure for managing and using that real estate; and
• in quantitative terms, it does not exceed the limits of an insignificant ancillary transaction.

In the Federal Fiscal Court’s view, these conditions were met in each of the cases decided. The Federal Fiscal Court based this on the fact that the buildings were, from an objective and functional perspective, designed for use as a shopping centre or department store and that an economically reasonable letting was only possible if the buildings were equipped with a goods lift. In the Federal Fiscal Court’s opinion, a goods lift forms part of the typical infrastructure of a multi‑storey shopping centre or department store which, for technical or structural reasons, must be provided by the landlord. Also in quantitative terms, the limits of an insignificant ancillary activity were not exceeded in either case. The Federal Fiscal Court took into account both the absolute amount of the acquisition and production costs of the goods lift (less than €100,000 in the case of the shopping centre and less than €20,000 in the case of the department store) and their ratio to the total acquisition or production costs (not stated for the shopping centre and more than €2.6 million for the department store).

3. Fiscal Court Münster: High‑bay warehouse in logistics property non‑prejudicial

According to judgment by the Fiscal Court Münster dated 12 March 2025 (case no. 10 K 1656/21 G), the letting of a high‑bay warehouse together with a logistics hall is not prejudicial to the extended trade tax reduction.

The Fiscal Court initially ruled that the high-bay warehouse constituted operating equipment. It held that a manually operated high‑bay warehouse – unlike a fully automated high‑bay warehouse – can in principle be accessed and used by people and therefore is not, for that reason alone, necessarily to be regarded as operating equipment. In the case at hand, however, the high‑bay warehouse did not provide any protection from the elements by enclosing the space. This was because the front of the high‑bay warehouse was open and did not have its own separate roof; moreover, the rows of racking did not serve to stabilise the enclosing structure of the hall.

However, in the Fiscal Court’s view, the provision of the high‑bay racking to the tenant was, on the basis of the settled case law of the Federal Fiscal Court, not to be regarded as a prejudicial ancillary activity because it served the management and use of the entity’s own real estate in the narrow sense and could be regarded as an essential and necessary part of a commercially reasonable structure for managing and using that real estate. In support of this, the Fiscal Court Münster stated that (i) the logistics hall was a special‑purpose property which could sensibly be let only as a warehouse (even if the hall could theoretically have been used for other purposes), (ii) the high‑bay racking was permanently affixed to the property and (iii) the tenant would in any event have had to install racking of its own, given the height of the hall, in order to make sensible use of it. In the Fiscal Court’s opinion, the quantitative element was also fulfilled because the acquisition costs of the operating equipment amounted to less than 5% of the total acquisition costs.

The Fiscal Court Münster allowed an appeal to the Federal Fiscal Court (case no. III R 11/25).

4. Fiscal Court Lower Saxony: Grease separator in supermarket/restaurant non‑prejudicial

According to judgment by the Fiscal Court of Lower Saxony dated 5 March 2025 (case no. 3 K 232/24), the letting of a grease separator as part of the rental to supermarket and restaurant operators is not prejudicial to the extended trade tax reduction.

In its ruling, the Fiscal Court of Lower Saxony concluded that the grease separator in the case at hand had not been included in the lease as it was not explicitly mentioned in the lease and was located outside the property.

However, the Fiscal Court of Lower Saxony adds that its decision would not have been different even if one had assumed that the grease separator was let together with the premises. According to the Fiscal Court of Lower Saxony, in that event, the letting would, on the basis of the settled case law of the Federal Fiscal Court, be regarded as a non‑prejudicial ancillary activity because the provision of the grease separator served the management and use of the entity’s own real estate in the narrow sense and could be regarded as an essential and necessary part of a commercially reasonable structure for managing and using that real estate. In its reasoning, the Fiscal Court stated, among other things, that (i) the building was a large complex in a central inner-city location with different types of use (mix of industries), where it was almost self‑evident that space would be let to restaurant businesses and (ii) the supermarket, given its size, required a grease separator. In the Fiscal Court’s view, the fact that the tenant structure in the building had not changed over many years also supported the view that the tenant mix served an economically sensible use of the property.

5. Excursus: Application of the VAT exemption to the letting of operating equipment

Of interest in this context is a recent development regarding the VAT treatment of the letting of operating equipment together with property. The tax authorities and the fiscal courts have so far interpreted the provision in section 4(12), second sentence of the German Value Added Tax Act (Umsatzsteuergesetz ‒ UStG) to mean that the letting of operating equipment together with property is to be regarded as a supply subject to value added tax, even if it takes place in connection with the VAT-exempt letting of property.

The Federal Fiscal Court no longer adhered to this view in its decision of 17 August 2023 (case no. V R 7/23), which is a follow-up decision to the ruling by the European Court of Justice, Finanzamt X v Y, of 4 May 2023 (Ref.: C-516/21). According to this case law, section 4(12), second sentence of the Value Added Tax Act does not apply to the letting or leasing of operating equipment where this constitutes an ancillary supply to the leasing of a property as the principal supply. Therefore, the first step is to examine whether there is a single economic supply consisting of a VAT‑exempt principal supply in the form of the letting or leasing of a property and an ancillary supply, inseparably linked to the principal supply, in the form of the provision of operating equipment. If that is the case, the ancillary supply is treated for VAT purposes in the same way as the principal supply, i.e. the provision of the operating equipment is likewise exempt from VAT and there is no scope for the application of section 4(12), second sentence of the Value Added Tax Act.

The Federal Ministry of Finance (Bundesministerium ‒ BMF) now apparently adopts the view of the Federal Fiscal Court. According to a draft circular from the Federal Ministry of Finance, the VAT Application Decree is to be amended, particularly in section 4.12.10. The draft states that the general rules for assessing whether a single supply exists are to be applied. If, as a result, the letting and leasing of operating equipment is ultimately to be regarded as an ancillary supply to the letting and leasing of a property, then the letting and leasing of the operating equipment is not subject to VAT. However, the draft clarifies in relation to rooftop photovoltaic systems that their letting or leasing constitutes a supply that is separate from and independent of the letting of the building.

C. Summary and outlook

The latest case law on the extended trade tax reduction is generally to be welcomed. The courts in particular display a practice‑oriented understanding of the economic circumstances when assessing whether the letting of operating equipment together with real estate can be regarded as an essential and necessary part of a commercially reasonable structure for managing and using one’s own real estate.

By contrast, the decision of the Fiscal Court Berlin‑Brandenburg on the trust model is unsatisfactory so that such a structure cannot readily be recommended for future planning until the Federal Fiscal Court has handed down its judgment (case no. III R 27/25). For existing structures, however, this does not necessarily mean that immediate adjustments are required. First, it must be examined whether the trust activity in the specific case falls below the 5% de minimis threshold introduced in the meantime. Second, the judgment of the Fiscal Court Berlin‑Brandenburg leaves open, among other things, whether a different legal assessment might apply where separate lease agreements for the real estate and the operating equipment are not economically practicable, particularly in the case of a large number of tenants. Each individual case must therefore be carefully reviewed to determine whether the Fiscal Court’s findings are transferable. It should also be noted that the Federal Fiscal Court has yet to rule on the case.

According to reports, the Ministry of Finance is currently considering abolishing the extended trade tax reduction or at least restricting its application. In our opinion, this would send the wrong signal given the current situation in the real estate industry. The original purpose of the provision, namely to avoid disadvantaging limited liability companies and limited partnerships that hold and manage real estate compared with individuals and asset‑managing partnerships, remains valid. The provision should therefore be retained and significantly simplified instead.