"New non-profit housing": more than just a paper tiger?

The reintroduction of the subsidisation of affordable housing within the framework of non-profit law has been a contested issue for years. Its reintroduction was intended to create a new dynamic in the construction and long-term social commitment of affordable housing. 

The draft bill of the German Annual Tax Act 2024 (Jahressteuergesetz 2024) was published on 5 June 2024. The regulations on non-profit housing fall well short of expectations and will doubtlessly miss their targets. Hopefully, there will be improvements here.

Non-profit housing: what exactly is this?

Non-profit housing has existed in the past: the term “non-profit housing” (Wohngemeinnützigkeit) means that the letting of housing at a reduced rent is recognised as non-profit. Under the further requirements of non-profit law, a landlord who lets housing at a reduced rent is exempt from corporate income tax and trade tax.

Such a regulation already existed. It contributed significantly to the development of housing after the end of the Second World War. The scheme was abolished in 1990, both in view of the loss of tax revenue and after the scandal surrounding one of the largest housing companies, "Neue Heimat".

Key points of non-profit housing 

The coalition agreement between the SPD, Bündnis90/Die Grünen and the FDP provides for the introduction of new non-profit housing with tax incentives and investment grants. The federal government had already presented a key issues paper on this last year.

Three possible implementation options were proposed.

The first implementation option provided that companies could expect to be exempt from corporate income tax and trade tax if they let out housing at a reduced rent to a specific target group as their core business. In return, the principle of asset commitment applicable in non-profit law would apply. Distributions would nevertheless be possible, but would be limited. This would be accompanied by state subsidies.

The second implementation option envisaged anchoring the tax exemption completely in non-profit law by also including “non-profit purposes” in the catalogue of tax-privileged purposes. However, there would be no further state subsidisation. In contrast to the first implementation option, distributions were also prohibited. 

The third implementation option considered granting a partial tax exemption if a company were to let out a certain percentage of its housing stock at a permanently reduced rent in accordance with certain "non-profit" criteria.

Current draft bill

The federal government has now decided in favour of the second implementation option. The draft of the German Annual Tax Act 2024 published on 5 June 2024 therefore only contains a regulation on including the letting of housing at a reduced rent in the catalogue of non-profit purposes. It does not specify the required rent reduction and only regulates the group of people to whom housing at a reduced rent may be let. There are no plans to provide accompanying support in the form of subsidies.

Criticism

The federal government itself already noted in its key issues paper that the second implementation option may not be expedient. The independent economic viability and investment capacity of companies based solely on tax-exempt income from subsidised letting was questionable. 

Furthermore, the existing ban on distributions was not likely to encourage large housing companies to divest part of their housing stock in order to transfer it to a non-profit organisation.

It is to be hoped that the federal government will recognise the weak points and make improvements here. 

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