What is it all about?

The public perception, pushed by politicians and the press, is that the German real estate transfer tax (RETT) applies unfairly: while every transfer of real estate itself is subject to RETT, it is assumed that the shares in real estate-rich corporations can "easily" be transferred without triggering RETT.

In fact, however, this is not so much a privilege for holders of large real estate portfolios but rather due to the mechanics of the law. RETT is only triggered if a single person acquires (or unifies in its hands) 95% or more of the shares in a corporation holding real estate: structuring transactions so that the main investor acquires 94% and an unrelated co-investor the remaining 6% is not necessarily the most sophisticated tax planning.

Every threshold creates hard cases and the German legislator is not, in fact, completely free to reduce or abolish the threshold without changing the character of the RETT from a transfer tax to a tax on capital movement. (It is disputed at which percentage threshold this change would occur.) While revenues from a transfer tax belong in their entirety to the federal states (state are even free to impose their own tax rates), a tax on capital movement would be for the federal account.

Where do we stand?

The draft bill, which has officially been published in May of this year, made its way almost unchanged through the formal legislative process and is currently before the German Federal Council (Bundesrat).

If the bill is enacted in its current form, the main changes to RETT would be:

  • lowering the threshold from 95% to 90%,
  • extending the observation period, during which transfers are added-up to test whether the threshold has been met, from five to ten years, and
  • expanding the RETT regime for partnerships to corporations. Under this regime, any transfer within the observation period counts towards the threshold, irrespective of whether the transfer is to the same person or completely unrelated persons (the "New Corporation Rule"). In effect, this means that the 94%/6% share deal structure would no longer work under the new rules (unless the seller retains a more than 10% participation and qualifies as an "old" shareholder).

The amended rules are intended to take effect from 1 January 2020 onwards.

What is at stake and under discussion?

Not surprisingly, there has been a lot of discussion on this RETT proposal. Two issues deserve closer attention.

First, the New Corporation Rules would be particularly detrimental for publicly listed corporations with a high free-flow and subsidiaries holding real estate. As indirect share transfers are caught (a more than 90% transfer of the shares in the parent is even deemed to constitute a 100% transfer), RETT could be triggered by the regular stock-exchange turnover of the parent's stocks. That RETT would, however, be owed by the subsidiary holding the real estate which would also be obliged to file the relevant notification. This raises constitutional concerns and, from a practical perspective, it is unclear how this can be monitored by the taxpayer (i.e. the subsidiary) and enforced by the authorities.

Secondly, the question arises whether the new ten-year observation period under the New Corporation Rule will apply on a look-back basis. This question is anything but academic. Assuming that in previous years 89.9% of the shares in a corporation owning real estate had been transferred, a transfer as little as 0.1% would trigger RETT under the New Corporation Rule from 2020 onwards. The relevant real estate portfolio would simply be locked in. The look-back issue also determines to a large extent whether taxpayers can still react and amend their structures to comply with the new rules. If any transfer within a ten-year look back-window would count towards the threshold, such measures would often be counter-productive and increase the likelihood that RETT will be triggered under the New Corporation Rule.

What will be next?

If the RETT proposal enters into force unchanged, it would probably be the first tax bill in German history to make its way through the legislative procedure without any amendments. Rumours have it that an exception (in whatever form) for publicly listed corporations will be introduced. Very recently, the German Federal Council (Bundesrat) recommended such a carve-out for listed corporations and proposed wording so that the look-back period does not apply retroactively. For the time being, transactions should be structured on the basis of the current proposal and one may want to speed them up (signing and closing) to still benefit from the current, less detrimental regime.

For the time being, transactions should be structured on the basis of the current proposal and one may want to speed them up (signing and closing) to still benefit from the current, less detrimental regime.