BFH clarifies three-property limit for corporations

In its decision of June 3, 2025 (Ref. III R 12/22), the German Federal Fiscal Court (BFH) clarified the limits of the extended reduction under Art. 9 No. 1 Sentence 2 of the German Trade Tax Act (GewStG) for corporations: If a real estate limited liability company (GmbH) sells more than three properties within three years – even en bloc to a single purchaser – this is a strong indication of commercial property trading. This exceeds the scope of mere administration and use of own real estate; the sustainability criterion of Art. 15 (2) of the German Income Tax Act (EStG) is not relevant for corporations in this case. The BFH thus confirmed the Berlin-Brandenburg Finance Court’s decision of January 18, 2022 (Ref.: 8 K 8008/21).

Background to the court case

The case decided by the BFH was as follows:

• A GmbH acquired five apartment buildings in 2016.
• In 2018, it sold all five properties en bloc to an affiliated company within a short period of time.
• The tax office denied the extended reduction under Art. 9 No. 1 Sentence 2 GewStG for the disputed year 2018; the Berlin-Brandenburg Fiscal Court confirmed the tax authority's opinion.
• The BFH rejected the appeal and agreed with the fiscal court’s assessment.

Key points of the BFH ruling

1. Exceeding the three-property limit as a strong indication: If a company sells more than three properties within a period of up to five years on a regular basis, this typically indicates commercial property trading. In the case in question, five properties were sold within three years, thus significantly exceeding the three-property limit.  
2. “En bloc” sales are not non-detrimental: It does not matter whether several properties are sold individually or en bloc to a single buyer. The only decisive factors are the number of properties sold and the time frame in which the sales take place.
3. No additional sustainability requirement for corporations: The BFH has clarified for the first time that, in the case of corporations, the income tax sustainability criterion (Art. 15 (2) EStG) does not have to be examined separately in order to deny the extended reduction if the other indicators – in particular, exceeding the three-property limit – are present. This very question had never been relevant to a decision in BFH case law and has now been clearly clarified by the ruling.

Significance of the decision for practice

The decision shows which aspects property-owning corporations should keep in mind in the future in order to maintain the conditions for the extended trade tax reduction:

• When acquiring and planning property sales, real estate GmbHs should pay attention to how many properties are being sold within a given period. Selling just four properties within five years is enough to trigger the indicative effect.
• Part ownership is also considered a separate property within the meaning of the three-property limit. Consequently, if an apartment building divided into several condominiums is sold en bloc to a buyer, the limit can be exceeded more quickly and often unnoticed.
• Intra-group transactions are not non-detrimental per se. Even intra-group sales can trigger the three-property limit.
• Sustainability remains irrelevant for corporations – it cannot prevent the denial of the extended reduction.
• Documentation and early tax planning are crucial in order to minimize the risk of commercial classification.

In its decision III R 12/22, the BFH clarifies the scope of the three-property limit for corporations. For property management companies, this means that anyone who sells more than three properties within a short period of time risks losing the extended reduction for real estate companies.

The extended reduction thus remains a perennial issue in case law and practice – and continues to be the focus of the tax authorities and, in particular, tax audits. In view of the numerous pitfalls, it is advisable to review and plan arrangements at an early stage in order to avoid potentially high additional taxes.