Investors interested in developments in Germany should be aware that the introduction there of the mandatory installation of photovoltaic (solar) power systems has put pressure on German real estate investors who will now have to consider the consequent real estate, tax and regulatory issues of this legislative change.

In recent months an increasing number of the 16 states of Germany have introduced legislation which makes it mandatory for developments in Germany to install a photovoltaic power system on the roof. In some cases, these mandatory provisions also extend to existing real estate where substantial roof alterations are undertaken. It may mean that without the installation of photovoltaic power systems, no building permit will be issued.

Although this is in tune with a more general move toward greener energy and the reduction of carbon emissions and may make economic sense it does, however, pose some significant challenges for real estate investors in Germany.

The main challenge is that German regulatory and tax law does not always facilitate the installation of photovoltaic power systems. The dangers include the risk of:

  • becoming subject to trade tax (Gewerbesteuer);
  • in the event of the investment vehicle or its investor being an alternative investment fund (AIF), the loss of certain privileges granted and/or losing the qualification as an AIF, which again will have material detrimental effects including all un-realised gains in the fund's assets becoming subject to tax in Germany; and
  • in case of an unregulated investment vehicle, becoming ineligible for German real estate funds, pension funds and pension schemes as part of the “real estate quota”.

Overcoming the legal hurdles will involve considering many different areas of law including real estate, tax, fund and investor regulation and energy regulation. Other factors will come into play such as the type of entity holding the property and whether that entity is regulated.  The outcome will also vary depending on whether it is residential or commercial property that is involved and whether the asset is an existing real estate asset or under development.

It is a complex area and our German legal experts would be very happy to discuss this in more detail with you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.