Tax Authority Adjusts Practice on Tenant Improvements
The German tax authority has updated its guidance on depreciation for tenant improvements. The new approach allows for a shorter depreciation period linked to the lease term.
DHPG, a German tax advisory firm, reports on a shift in the German Federal Ministry of Finance's (BMF) administrative practice concerning depreciation of tenant improvements. The updated guidance allows for a shorter effective useful life to be considered for these installations.
Historically, depreciation for tenant improvements largely followed the standard depreciation periods for buildings, often resulting in long amortization schedules and minimal annual deductions. The BMF's directive from February 2023 (BMF-Schreiben) modifies this, now permitting a shorter, lease-term-based useful life without requiring specific proof of shorter duration.
DHPG highlights that this change can significantly impact tax liabilities in cases involving substantial tenant improvements. Taxpayers are advised to review their tax positions and consider applying for a shorter depreciation period in open and future tax assessments.
The adjustment, based on Section 7 of the German Income Tax Act (EStG), is particularly relevant for real estate taxation and may offer tax advantages for businesses and investors making improvements to leased properties.