Proposed Changes to German RETT regime for share deals

Introduction

On 21 June 2018 the Finance Ministers of the 16 Federal States (Landesfinanzministerkonferenz) convened for a routine conference during which they agreed ‎on a proposal to amend the real estate transfer tax (RETT) regime for so-called "share deals". Unfortunately, it is not quite clear which form these amendments will take, since a draft bill has not been published.

In summary

The proposal aims at the introduction of a regime under which the threshold triggering RETT is lowered from 95% to 90% and the shareholding period is extended from 5 to 10 years. There are concerns that the extension of the holding period could be applied to existing structures. Furthermore, it is in discussion that corporate entities should be – for RETT purposes – treated like partnerships. Consequently, it seems that not only the unification of the 90% of shares in one hand would trigger RETT, but also the direct or indirect transfer of shares. It is still unclear if exceptions for internal restructurings will be introduced. This may lead to significant obstacles to group restructurings.

Current situation

 Under current German tax law, shares in a corporate entity owning German real property can be transferred without triggering RETT unless a single acquirer (or a qualifying group) directly or indirectly acquires 95% or more of the shares. Hence, in a number of transactions a minority partner holds at least 5.1% of shares in corporate entities.

The transfer of interest in property owning partnerships is subject to RETT if 95% or more of the interest in the partnership directly or indirectly is transferred to one or more new partners within 5 years.

Consequently, by choice of the legal form of the entity holding the property, observing the threshold of the stake held and applicable shareholding period, triggering RETT during internal restructuring measures could currently be avoided.

Possible new RETT-regime

According to currently available information it is intended to amend the RETT regime so that

• a similar rule for corporate entities which currently applies for partnerships;
• a reduction of the threshold to 90%;
• an extension of shareholding period to 10 years

would be introduced.

Hence, in a share deal transaction in which initially less than 90% of the shares were transferred, RETT would be triggered in case further shares are transferred during the following 10 years so that the 90% transfer restriction would be exceeded. As mentioned, no bill has been proposed, yet. In particular, it is currently being discussed whether good faith reliance on the current regulations would protect against a possible retroactive effect.

Structures which relied on the shielding effect of corporations should be checked and adjusted (if necessary), since indirect transfers of shares in corporate entities could now also trigger RETT.

Furthermore, structures which were established to acquire all shares after 5 years (e.g. sale-and-lease back structures) should carefully be reviewed since it is in discussion to extend the holding period.

Outlook

Unfortunately, no draft of the new RETT rules exists yet. Due to the start of the summer break of the German parliament in the beginning of July 2018 a draft of the new RETT rules is unlikely prior to September 2018. It is not completely ruled out that the new RETT rules could be introduced with retroactive effect (worst case with effect from 21 June 2018).

However, we assume that due to constitutional restrictions and the bona fide trust of the tax payer in the current RETT rules, the possibilities for introduction of the new rules with retroactive effect should be limited. Press releases stating the intention to change tax rules have not yet been considered to justify a retroactive effect.