Please note: This text is for information purposes only and is not a substitute for individual tax advice. A tax adviser should always be consulted regarding specific tax matters.
The financing of commercial property is not merely a matter of raw figures, but also an area in which tax considerations play a key role. As with private investments, the financial terms must be right when it comes to commercial property financing. However, there are numerous ways to take advantage of tax benefits, particularly through interest and depreciation allowances, as well as through the correct treatment of capital repayments. The most important tax aspects of commercial property financing include business rates, interest, capital repayments, depreciation, VAT and land transfer tax.
Trade tax and interest: tax savings through deductions
Trade tax is a tax levied by local authorities on a company’s profit and normally amounts to 3.5 per cent of trading profit. Trading profit is calculated as turnover minus operating expenses and losses.
Interest paid on the financing of a commercial property can be deducted as a business expense. This reduces the business income and, consequently, the trade tax.
Example of tax savings through interest deductions:
Imagine a business generates a trading profit of 150,000 euros and has paid 30,000 euros in interest on a property loan. The trade tax on the original trading profit of €150,000 would amount to €5,250. If the interest is deducted as a business expense, the trading profit is reduced to €120,000. The trade tax on this amount comes to 4,200 euros. In this case, the company has saved 1,050 euros in trade tax by deducting the interest.
Repayment and tax deductions:
Loan repayments cannot be claimed for tax purposes. Repayments do not constitute a business expense, as they simply represent the repayment of the capital borrowed.
Depreciation of commercial property:
Depreciation on commercial property can be spread over its useful life, which is usually 33 1/3 years. This depreciation is claimed as a business expense in the tax return. Companies must state the acquisition cost of the property and the chosen depreciation method.
Types of depreciation:
- Straight-line depreciation: With straight-line depreciation, the acquisition cost is spread evenly over the useful life. This method is simple and straightforward.
- Declining-balance depreciation: Here, the acquisition cost is depreciated at a higher rate in the early years, with the rate decreasing in subsequent years. This method is only permitted for properties built after 31 December 1924 and may, under certain circumstances, lead to greater tax benefits, but it is more complex to calculate.
VAT on commercial property financing:
Value added tax on the acquisition or construction costs of a commercial property is generally deductible. Businesses can claim this as input tax, provided that the property is used for business purposes by at least 10 per cent and serves to generate income. The relevant invoices must be retained and declared in the tax return.
Land transfer tax and tax deductibility:
Land transfer tax, which is payable on the purchase of land, is classified as a incidental purchase cost and cannot be deducted as a business expense.
Conclusion:
Choosing the right financing is a crucial step towards a successful property investment. Investors should always seek professional advice for detailed tax guidance. However, anyone looking for the right financing solution can easily contact the experts at OFFMARKET24.
