German real estate transfer tax update

Introduction

After the coalition agreed on a draft real estate transfer tax bill in the Finance Committee of the German Parliament (Bundestag) the Bundestag approved the respective draft in the second and third reading on 21 April 2021. The long-planned reform of the real estate transfer tax act (RETT Act) in particular aims at avoiding the use of share deals as RETT optimising instrument. In share deals, it is not the property itself that is sold, but the participation in the company that owns the property.

The amendment of the RETT law was originally based on an initiative of the finance ministers of the 16 federal states. A respective draft bill was already presented by the government and was supposed to be effective as of 1 January 2020. It was, however, put on hold upon considerable criticism. The draft bill which has now been approved by the Bundestag only slightly differs from the one in 2019.

Presumably, the German Federal Council (Bundesrat) will discuss the new law in May. If the Federal Council approves the draft, the changes would already come into force on 1 July 2021. The main changes are in particular:

• the lowering of the participation thresholds (pls. ref. below to cif. II 1),
• extensions of holding periods (pls. ref. below to cif. II 2),
• as well as an introduction of a new regime for corporations (pls. ref. below to cif. II 4).

The main amendments of the new RETT Act are outlined in this newsletter.

The amendments

Reduction of the participation thresholds and extension of the holding periods in case of partnerships (Sec. 1 para. 2a)

Amendments

To date, RETT is triggered if the shareholder structure of a partnership owning a property changes in such a way that 95% or more of the shares are transferred to new shareholders within five years.

The amendment provides that RETT is then already triggered if at least 90% of the shares are transferred within 10 years. After a reduction to a participation rate of 75% had been discussed in the meantime, an agreement was apparently reached on a threshold value of 90%.

Application

In terms of time, the new regime is intended to cover all transactions where the partnership interest is transferred after the amendments have been effected, i.e. presumably after 30 June 2021.

If on 30 June 2021 five years have already passed since the acquisition of an interest in a real estate owning partnership, these years are not taken into account for the threshold observation.

For changes to the partnership before 1 July 2021, the previous regulations continue to apply.

Exemptions for partnerships (Secs. 5, 6)

Amendments

Section 5 and 6 RETT Act contain exemptions in respect of the transfer of real properties between partnerships and their partners. RETT does not arise on such transfer to the extent a partner already participates in the partnership at the time of the transfer.

Until now, a five-years holding period (after the transfer) applied. In the event of changes in the partner structure within this period, the exemption was not granted. This period is now to be extended to 10 years.

Furthermore, a holding period of five years applied in the event that a property is transferred from a partnership to one or more partners or to another partnership, which is now to be extended to 15 years.

Application

The new provisions shall apply for transactions which take place after the new law has become effective, provided that the holding periods under the old law have not yet expired.

Impacts in Practice

The 15 years holding period particularly affects structures in which an acquirer initially acquired less than 95% of the interests in a property-holding partnership. Thereafter, he acquired the remaining shares (mostly due to a related call option) after the five years had expired.

In this case, real estate transfer tax only arose in respect of the minority interest acquired. The extension to 15 years is intended to prevent in particular these structures.

Concentration in one hand (Sec. 1 para. 3) and economic participation (Sec. 1 para. 3a)

Amendments

Consequently, the reform also provides for the reduction of the thresholds to 90% for the concentration of shares in one hand under Section 1 para 3 RETT Act as well as for the economic participation pursuant to Section 1 para 3a RETT Act.

Application

If on 30 June 2021 the participation threshold of 90%, but not 95%. has been directly or indirectly exceeded, the provisions of the current law shall continue to apply, i.e. increases in shareholdings to 95% or more will not be possible in a RETT neutral way.

Transfer of shares in corporations (Sec. 1 para. 2b)

Amendments

The regime for partnerships as mentioned under Section 1 above shall now also apply to corporations. Pursuant to the newly introduced sec. 1 para. 2b RETT Act the concentration of shares in a corporation shall not be relevant but the mere transfer of at least 90% of the shares.

Under the already existing provision of sec. 1 Para. 3 RETT Act only the concentration (either by increase of existing shareholding or immediate acquisition) of now at least 90% of the shares or a respective claim shall be decisive. The new provision is supposed to apply if the shareholders' structure is changing in a way that at least 90% of the shares are transferred to new shareholders within a period of 10 years. A concentration in one hand is not required. Besides direct changes, indirect changes in the shareholder structure, e.g. in superordinate group structures, should also be taken into account under certain circumstances.

Even though the regime for partnerships was actually adopted the exemption provisions of sec. 5 and 6 RETT Act shall not apply to case of sec. 1 para. 2b RETT Act.

Tax payer and subject to the notification obligations is the real estate owning corporation itself.

The details of the application of the new sec. 1 para. 2b RETT Act (new) are, however, not yet clear even if reproducing the language of the parallel provision of sec. 1 para. 2a RETT Act. It will finally depend to which extent the case law in respect of sec. 1 para. 2a RETT Act will be applied respectively. This would be at a first glance consequent but even would strengthen the inconsistency.

Application

Sec. 1 para. 2b RETT Act applies to transfers after 30 June 2021. Acquisitions prior to 1 July 2021, however, are not taken into account for the 10 years holding periods.

Impact in Practice

The introduction of sec. 1 para. 2b RETT Act (new) is the core piece of the RETT reform. In practice a mere reduction of the threshold from 95% to 90% would have changed the economic parameters of the already known acquisition structures together with an independent minority shareholder with now more than 10% shareholding.

However, the general structure with two independent investors would not have been changed. Only the new provision of sec. 1 para. 2b RETT Act (new) avoids, as intended by the legislator, this RETT optimising structure.

Now, it is no longer possible to sell on a participation in a real estate owning corporation which was acquired as tandem with a minority shareholder. Even if there is no concentration of at least 90% in the hand of one acquiror the mere transfer of at least 90% (to several acquirors) triggers RETT. The benefit from the holding period of 10 years is in such cases limited because the investment horizon of real estate investors is often shorter.

A RETT free acquisition of a shareholding in a corporation and a subsequent RETT free sale is therefore only possible for a majority shareholder together with an "everlasting" minority shareholder. It will turn out in practice whether structures are available which are economically attractive for such minority shareholders.

Against this background, real estate investors may focus on the so called unit-deal. Whether mezzanine or derivate structures which are already discussed in the market may be an alternative will not least depend on whether or to which extent case law in respect of indirect acquisitions in the context of sec. 1 para. 2a RETT Act are also applied to the application of the new rule.

However, it is welcome that the legislator followed the objection of the Financial Committee (Finanzausschuss) of the Bundesrat and decided that transfers prior to the effectiveness of the new law shall not count. Thus, there is certainty that only future transfers need to be monitored.

Finally, the corporation owning the real estate itself is the tax payer for the real estate transfer tax arising under sec. 1 para. 2b RETT Act (new) and is obliged to report it. In practice, this results in considerable reporting and documentation obligations. The managing director of a corporation will often not be aware of when or whether shares have been transferred, in particular if shares were indirectly transferred.

Exemption for listed companies (Sec. 1 para. 2c)

An exemption of transfers of shares in listed companies from the calculation of the thresholds for the purpose of sec. 1 para. 2a and 2b RETT Act was initially not provided in the first draft bill of the new RETT law. Now, such a provision is adopted in sec. 1 para. 2c RETT Act (new). Accordingly, transfers of shares in corporations admitted to trading on a trading venue in Germany, the European Union or the European Economic Area or a third-country trading venue that has been declared equivalent by the European Commission pursuant to Article 25 para. 4 letter a of Directive 2014/65/EU shall not be taken into account for the respective thresholds.

Intra-group reorganisation (Sec. 6a)

Sec. 6a RETT Act contains privileges for intra-group acquisitions in the course of restructurings, such as reorganisations under the German Reorganisation Act (Umwandlungsgesetz) or acquisitions on the basis of corporate law measures. However, these privileges only apply if the measure involves a controlling company and dependent companies or only dependent companies. A dependent company qualifies as such if the controlling company holds at least 95% of its shares continuously within a period of five years before and after the relevant legal transaction. Both the 95% threshold and the five-years holding periods have not been adjusted.

Conclusion

The RETT reform has held what it promised. Due to the reduction of percentages, the lengthening of holding periods and last but not least the implementation of sec. 1 para. 2b RETT Act share deals will become less attractive. If nevertheless executed share deals will be more complex and acquisitions of real properties will become more expensive.

The creation of a parallel rule to sec. 1 para. 2a RETT Act for corporations mistakes that these both legal forms are not comparable. Sec. 1 para. 2a RETT Act is based on the partnership being a transparent legal form. Due to its transparency the transfer of at least 95%/90% of the interest in such a company shall be treated as a transfer of the real property to a new partnership for RETT purposes. It is evident that such system cannot apply to a corporation. Further, the legislator is not consequent in the implementation of such inconsistency. The privileges of sec. 5 and sec. 6 RETT Act shall not apply to cases of sec. 1 para. 2b RETT Act (new). Therefore, the new rule is not only an application of the regime which has been, until now, only applicable to partnerships but goes beyond.

At least in respect of some aspects, such as the exemption for listed companies and the application rules the legislator has given in due to the reasonable objections of associations and the committees of the Bundesrat.