In 2025, ESG criteria will become a key management tool for the fund and real estate industries. In addition to regulatory requirements, tax implications are increasingly becoming a focus for owners, investors and companies. As part of the ESG transformation, the German government has introduced numerous tax measures to promote sustainable investment and to achieve climate policy goals through fiscal steering. This applies directly, for example, to sustainable tax policy, the tax burden and public reporting on tax strategy, as well as to targets, key performance indicators and compliance.
Despite all this, taxation remains in the shadows, since at first glance, it is not one of the core areas of sustainability. However, the avoidance of sustainability risks has become an essential part of tax advice, particularly in the due diligence process for regulated funds (both infrastructure and real estate funds). A sustainability risk is an event or condition in the environmental, social or governance areas which could have an actual or potential material negative impact on the value of the investment (see Article 2 No. 22 of Regulation (EU) 2019/2088 of 27 November 2019 on sustainability-related disclosure requirements in the financial services sector (“Disclosure Regulation” link). The identification of tax risks is therefore particularly relevant in the context of good corporate governance and sustainable tax policy.
We now present two examples in which tax sustainability aspects play a significant role in the decision to invest:
1. Acquisition of a renewable energy project
In practice, the acquisition of renewable energy projects is a particularly troublesome area. For traditional real estate investors, the highly regulated field of renewable energies (photovoltaic systems, wind turbines and battery storage) is still unfamiliar territory, which presents various pitfalls compared to “traditional” investments in a logistics centre.
From a tax perspective, renewable energy projects also have several special features for real estate investors.
First, internal tax processes must be adapted to meet the requirements of good corporate governance and a sustainable tax policy. After all, energy generation in Germany is generally considered a primary commercial activity, which until now has been strictly avoided.
However, the purchase of projects, often through the acquisition of shares in a project company, also presents tax challenges. The project is usually still in its early stages: The granting of public law approvals and the regulation of the grid connection still need to be awaited. In addition to structural issues, such as the relationship between the project and project development company or the general contractor agreement between the project company and the seller, the special tax requirements of the landowners (often farmers or municipalities) must also be considered.
These aspects raise the question, particularly for regulated investment funds, of whether the project can be acquired at this stage if both regulatory and tax requirements have to be met. In this respect, the requirements relating to corporate governance and tax policy have an impact on the respective fund manager.
2. Acquisition of an existing property with the intention of conversion
The acquisition of an existing property is a special case from a tax sustainability perspective. Around 83.5% of German properties are older than 25 years (see 2022 census). Approximately 36.2% of German real estate was built between 1960 and 1989 and requires considerable investment in some cases to meet current requirements, particularly in terms of energy efficiency. In addition to the advantage of the sustainable reuse of resources already used in the construction of the existing building, (comprehensive) revitalisation can often be more economically attractive than demolition and new construction.
In these cases, it is relevant to the sustainability strategy and needs of real estate investors how tax optimisation can promote the economic optimisation of sustainable properties. However, these requirements and expectations of investors are also both a challenge and an opportunity for real estate funds when identifying suitable existing properties.
Tax opportunities will certainly be available for existing properties in the foreseeable future. This is because the Federal Ministry of Finance intends to revisit the issue of the tax treatment of property renovations (specifically: the distinction between immediately deductible maintenance expenses, acquisition costs for bringing the property into operational readiness, production costs and acquisition-related production costs within the meaning of Section 6(1)(1a) of the German Income Tax Act (EStG) in the case of the repair and modernisation of a building.) The BMF has circulated a draft letter on the tax treatment of immediately deductible measures and production costs in the renovation of real estate and has invited various associations to comment.
Despite new clarity in various areas, the draft still contains significant gaps regarding energy-related repair and modernisation measures, which are highly relevant in practice. It is hoped that these gaps will be closed by taking the comments of the associations into account. It is to be hoped that the legislator will follow the associations’ suggestions and create exceptions for energy-efficient repair and modernisation measures within the scope of acquisition-related production costs, e.g. by introducing a special depreciation allowance.
The question of how a reduction in energy consumption is to be treated for tax purposes in the same way as a so-called standard increase also remains unclear. Here too, it would be desirable for reasons of sustainability to give preferential treatment to energy-related repair and modernisation measures.
