August 15, 2019

Planned tightening of law governing transfers of real estate

Background

Real estate transfer tax (RETT) is levied on sales transactions involving domestic real estate. Even sales in which it is not the properties themselves that are being sold, but rather real estate companies themselves ("share deals") may also be subject to RETT under certain conditions, however. The legal form of a company has played a crucial role in these types of transactions to date. Whereas under current law, real estate transfer tax only applies to the sale of shares in a corporation owning real estate if one purchaser acquires at least 95% of the shares (a so-called "aggregation of shares"), the sale of partnerships owning real estate is now to also trigger RETT if at least 95% of the partnership shares are transferred to several purchasers within a five-year period of time (section 1 (2a) of the German Real Estate Transfer Tax Act (GrEStG)). In a draft bill from 8 May 2019, the Federal Ministry of Finance has published inter alia planned amendments to the law applying to share deals subject to RETT.

Overview of the most important amendments of the law

First of all, a basic extension of relevant retention periods is being planned for transfers of partnership shares in accordance with § 1 (2a) and for the applicability of tax exemptions to transfers of real estate to and from joint ownership companies ("Gesamthandgesellschaften") in accordance with § 5 and § 6 of the German Real Estate Transfer Tax Act (GrEStG) from five years at present to ten years in the future. The investment limit previously applying to changes in shareholders and share associations subject to RETT is to be reduced from 95% to 90% in the future. Frequently used arrangements, in which 5.1% of shares were initially retained and only sold after expiry of the five-year period, will face tighter restrictions as a result of these amendments to the law. To ensure that acquisitions of shares by corporations and partnerships are treated equally, a new amendment is being planned in section 1 (2b) of the German Real Estate Transfer Tax Act (GrEStG) to govern changes in shareholders of corporations. Under the amendment, the transfer of more than 90% of company shares to new shareholders within a period of ten years is to be subject to RETT in the future - analogous to the case with partnerships.

Outlook

With the planned legislative amendments, the German legislator is pursuing the aim of reducing the latitude available and restricting abusive tax avoidance strategies. From the perspective of consulting practice, however, the amendments to the law also warrant critical review, as non-abusive restructuring steps could also trigger RETT in the future. Particularly in light of a tendency to impose excessive administrative rules in places - as has been reflected in more recent decrees regarding application - in future taxpayers face a risk of accidentally committing real estate transfer tax offences. Therefore, the draft bill is likely to be subject to further political discussion within the next months. Even if the planned amendments to the law are only to come into force for acquisitions of shares that take place after 31 December 2019, the transitional regulations that are being planned also have retroactive implications for periods in the past. Your dhpg advisors will be happy to provide you with comprehensive, circumspect and forward-looking advice on structuring and defending such transactions in the future.

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