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Brussels, 31 January 2008

Direct taxation: Infringement proceedings against Germany for its discriminatory depreciation-rules applied to buildings situated abroad

The European Commission has formally requested Germany to modify its legislation related to reducing-balance ("degressive") depreciation for wear and tear on buildings. According to German law, reduced balance depreciation is only applicable to buildings situated in Germany. The Commission considers this limitation incompatible with the principle of free movement of capital in the Internal Market. The request takes the form of a ‘reasoned opinion’ (second step of the infringement procedure provided for in article 226 of the EC Treaty). If the relevant national legislation is not amended in order to comply with the reasoned opinion, the Commission may decide to refer the matter to the European Court of Justice.

According to German law, depreciation of wear and tear for buildings is generally done by linear percentages. However, Section 7 (5) of the Income Tax Act (EStG) provides, by way of derogation, for reducing-balance depreciation (i.e. higher percentages are applied in the first year(s) and lower ones in subsequent years) in case of rental houses situated only in Germany. This tax deferral is designed to produce financial incentives for the construction of rental housing.

As the financial burden is particularly heavy in the first years after the purchase of a building, it becomes less attractive to become economically involved in, or more specifically, invest in buildings situated abroad. As a result, investors may be deterred from purchasing a building in another EU Member State. In the Commission's view, this constitutes an obstacle to the free movement of capital as guaranteed by Article 56 of the EC Treaty.

Although Section 7(5) EStG was repealed for all buildings acquired or constructed after 1 January 2006 the Commission continues the infringement procedure as depreciation for wear and tear pursuant Section 7(5) EStG continues to have effect for a period up to 18 years. So, buildings situated abroad that were constructed before 1 January 2006 and meet the requirements of Section 7(5)(3)(c) EStG would be denied the advantage of the increased depreciation for up to 15 years. For this reason, the provisions should be reviewed despite the amendment to the law applicable since 1 January 2006.

The Commission's case reference number is 2006/4667.
For the press releases issued on infringement procedures in the area of taxation or customs, see:
For the latest general information on infringement measures against Member States see:

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