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Taxation of businesses and apartments

Consulting / HelpLegal / Tax

Revenue and income of prostitution businesses' operators are, as all other businesses, subject to taxation. Both the actual realization of the contractual relationship and the operational appearance from the basis for the decision over the fiscal classification of the business.

1. Operators
If someone acts as the proprietor of a prostitution business to the outside world, i.e. by placing advertisements or advertising the services to expected by customers, one is considered as the operator of said prostitution business. As such, one has an obligation to keep records.
All revenue and expenditures (also in cash) have to be kept for 10 years in a written documentation which has to be complete, correct, timely and in order.

Additionally, the operator of a prostitution business submit monthly a VAT return and if necessary a income tax registration for the previous month. Also the sales tax return, the income tax return, a profit determination and if necessary business tax return have to be submitted annually.
Those documents are to be transmitted electronically to the competent tax office.

Basically, all revenue connected to this prostitution business will be attributed: Revenue from letting, entrance, sales of beverages and aids. These include 100% of the revenues generated by the prostitutes, which are both subject to VAT and income tax.
Payments to prostitutes working in the operators' prostitution business can be claimed as operational expenses, though. These can be approved, if the competent tax office has the names of the persons working in this prostitution business available. If this is not the case, the tax office can deny the deduction of the operational expenses claimed by the operator.

Two modes of employment are possible for prostitutes: They either offer their services as independent subcontractors or as employees. The second mode integrates the prostitute fully in the operational processes and bound by instructions concerning time, duration, and nature of service.
An Operator has to pay income tax for his employees to the tax office – whether they work as prostitutes, bar staff, cleaning personnel or janitors does not matter.

The electronic income tax characteristics (ELStAM) of the employees have to be requested at the Federal Tax Office and integrated into the employees's payroll accounts, so that the amount of payable income tax can be calculated.
Additionally, social security contributions have to be paid to the respective health insurance.

If the taxable profit exceeds 24.500 Euro considering certain positive and negative attributions, the operator has to pay business tax, too.

2. Lessors
Persons count as lessor, if they lease an object (normally living space) to prostitutes in return for payment of rent or similar compensatory measures and are not acting as the proprietors of a prostitution business to the outside world.

Leasing is subject to VAT, if granted for a short term or if organizational measures are taken for promoting or facilitating contact to the customers (i.e. a contact room).

From this point of view, the lessor is obligated to invoice his services or rather set up a lease. A copy of these documents have to be kept for 10 years. They have to contain the following information:
• the full names and addresses of both the lessor and the prostitute
• the tax number of the lessor
• the date of issue
• a consecutive invoice number
• the type and date of the invoiced service
• the fee, the tax rate and the tax amount on that fee
Violations of timely issuing the documents or the ten-years retention obligation is punishable by the tax office as an administrative offence with a fine.