Dr Annette Zitzelsberger
On 08 May 2019, the German Federal Ministry of Finance published a draft tax bill on real estate transfer tax (RETT), which provides for a severe tightening of the tax rules for share deals. There may be amendments in the course of the further legislative procedure and investors should closely monitor the legislative process, but currently major changes consist of:
- Lowering of the acquisition or investment threshold triggering RETT from 95% to 90%;
- Application of the less favourable partnership RETT change of ownership rules to corporations;
- Extension of the look-back period for cumulative ownership changes from five years to ten years.
In general, the new rules shall apply to transactions closed after 31 December 2019. There will be highly complex transitional rules, mainly aimed at ensuring that transactions with investment levels of at least 90%, but less than 95%, do not remain tax-free if the (former) 95% threshold is reached in the future.
Current RETT Rules for Share Deals
Under the current rules for share deals, RETT is triggered if an investor (or a group of affiliated investors) acquires a direct and/or indirect ownership of at least 95% in a company owning German real estate. The applicable RETT rates range from 3.5% to 6.5% of the gross value of the properties, depending on in which Federal State they are located.
When the real estate company has the legal form of a partnership, RETT is also triggered if within any period of five years there is a direct or indirect transfer of interests of at least 95% to new shareholders. A standard way of avoiding RETT on share deals is to acquire property companies together with unrelated co-investors that hold at least 5.1% or, in the case of partnerships, leave at least 5.1% of the interests for at least five years with the seller.
Frequently, property companies in the legal form of partnerships are converted into corporations prior to the acquisition in order to avoid the application of the special change of ownership rule for partnerships.
Proposed New Rules
Under the new rules, RETT would be triggered if an investor (or a group of affiliated investors) acquires a direct and/or indirect ownership of at least 90% in the property company. The same applies if there is a direct or indirect transfer of the ownership of the property company, in the legal form of a partnership or a corporation, to at least 90% new shareholders within any period of ten years. Thus, it will no longer be possible to avoid RETT on share deals if the main investor acquires the property company together with a >10% co-investor, as both would qualify as new shareholders.
The conversion of a partnership into a corporation would also no longer help to avoid RETT as the new change of ownership rules apply regardless of the legal form of the property company. A share deal may still be executed in a RETT-neutral way under the new rules if >10% of the shares in the property company remain with the seller for at least ten years. However, even if the seller continues to hold the >10% shares, RETT might be triggered in case of a change of ownership in the seller within the ten-year period (which could be seen as an indirect transfer of its shareholding). If an investor reaches the 90% ownership threshold, he will owe RETT. In contrast, the respective property company will owe RETT triggered due to a 90% transfer of ownership to new shareholders within ten years.
The draft bill does not provide for an exemption for listed property companies, although these will hardly be able to monitor a relevant change of their investor base. Even though the new rules generally only apply for transactions executed after December 31, 2019, the transitional rules require that transactions of the past are considered as well. It will be of particular importance to review the RETT impact of the execution of put or exit rights of co-investors negotiated under the current rules. In order to assess the RETT consequences of share transfers under the new rules, it will be required to analyse all direct and indirect share transfers in companies owning German properties that occurred during the last ten years.
XLNC MAGAZINE | No. 04 | November 2019