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Brussels, 19 March 2009

Direct Taxation: The European Commission refers Germany to the European Court of Justice over its discriminatory rules for buildings abroad

The European Commission has decided to refer Germany to the European Court of Justice for its discriminatory tax depreciation rules applied to buildings situated abroad. Under German law higher percentages of depreciation may be applied in the first year(s) of construction or acquisition of buildings situated in Germany than for buildings situated abroad. The Commission considers this difference in treatment to be incompatible with the principle of free movement of capital.

According to German law, buildings are generally depreciated for wear and tear using the linear depreciation method. Section 7(5) of Income Tax Act [EStG] provides, by way of derogation, for reducing-balance depreciation in case of construction of rental housing in Germany i.e. higher percentages are applied in the first year(s) and lower percentages in subsequent years. However, this advantage (tax deferral) is not granted for buildings situated outside Germany.

In the Commission's view, this tax provision constitutes an obstacle to the free movement of capital as guaranteed by Article 56 of the EC Treaty. As the financial burden is likely to be particularly heavy in the first years after the purchase of a building, the investment in buildings situated abroad becomes less attractive due to these less favourable depreciation rules and investors may be deterred from purchasing a building in another EU Member State.

Although Section 7(5) EStG was repealed for all buildings acquired and constructed after 1 January 2006 the Commission continues the infringement procedure as depreciation for wear and tear pursuant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 of up to 18 years. Consequently, buildings situated abroad that were constructed before 1 January 2006 and meet the requirements of Section 7(5)(3)(c) EStG would still be denied the advantage of the increased depreciation for the remaining part of this period.

Given that the German tax rules were not amended to comply with the reasoned opinion sent to Germany in January 2008 (IP/08/146), the Commission has decided to refer the case to the Court of Justice.

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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