In November 2018, Germany’s state finance ministers already presented a draft law for a real estate transfer tax reform. Its aim is primarily to reduce the existing scope for action relating to share deals in real estate transactions. The provisions are to be included in the 2019 Finance Law, which is scheduled to be discussed in the Cabinet at the end of April. Share deals that deliberately use the current legal situation to avoid real estate transfer tax should therefore ideally be concluded by the end of April.
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1. Existing regulations
Currently, Section 1(2a) Real Estate Transfer Tax Act stipulates that a(n) (in)direct change of shareholders of a landowning partnership will only trigger real estate transfer tax whenever at least 95% ownership in the company assets are transferred to new shareholders within 5 years.
In legal transactions which give rise to a claim to the transfer of one or more shares in a corporation, this process only triggers real estate transfer tax whenever (in)indirectly at least 95% of the shares in the corporation end up being held by one acquirer in the economic sense through the transfer, Section 1(3)(1) Real Estate Transfer Tax Act. The scope of application is to be considerably extended by an amendment to the law.
2. Intended amendments
The holding periods, the observance of which is governing the exemption from real estate transfer tax, are to be extended. Consequently, the 5-year period of Section 1(2a) Real Estate Transfer Tax Act is scheduled to be extended to 10 years.
The relevant participation threshold is to be reduced from at least 95% to at least 90% of shares in all cases covered by the Real Estate Transfer Tax Act, and
landowning corporations are also to be covered by the provisions of Section 1(2a) Real Estate Transfer Tax Act in the future.
3. Consequence for the share deal
As a consequence of these changes, transfers of real estate assets by way of a share deal will only be exempt from real estate transfer tax whenever existing shareholders retain a stake of more than 10% over the subsequent 10 years. In the past, a co-investor structure was frequently used to avoid real estate transfer tax, i.e., the shares in the company were acquired by two buyers, each of whom took over more than 5% (the remaining percentage was irrelevant). In future, to avoid real estate transfer tax, at least one existing shareholder will always have to retain a stake of more than 10% in the company for 10 years, both for partnerships and corporations.
4. Additional amendments
4.1 Sections 5, 6 Real Estate Transfer Tax Act
The 5-year period in Sections 5, 6 Real Estate Transfer Tax Act will be extended to up to 15 years. According to Sections 5, 6 Real Estate Transfer Tax Act, real estate transfer tax in the amount of the shareholder’s interest in the real estate before and after transfer from or to a partnership or between partnerships is not levied if the share before or after the contribution corresponds to the previous fractional assets. It is required, however, that prior and subsequent retention periods are observed, which will now be significantly extended.
4.2 Reduction of the relevant level of shareholding
The reduction of the relevant shareholding from 95% to 90% also affects the provisions on the “legal” or “economic shareholding association” (Section 1(3), (3a) Real Estate Transfer Tax Act). To avoid an association of shares, it must therefore be ensured in the future that no shareholder of a landowning partnership or corporation has direct and/or indirect legal or economic interest in the company of at least 90% (instead of 95%).