Structuring the investment
Depending on whether the property is owned by an individual or a holding vehicle in the form of a legal entity, the acquisition of real estate can be structured as an asset deal, acquiring the asset from the individual or the holding vehicle, or as a share deal, acquiring the shares in the holding vehicle from the shareholders.
As the acquisition of – currently – 95 per cent or more of the shares in a legal entity that owns German-situs property (the relevant threshold will quite likely be lowered to 90 per cent according to most recent legislative initiatives (see Section VII.i)) triggers real estate transfer tax (RETT), structures are being used under which the seller retains more than 5 per cent (in the future likely 10 per cent, cf. comment above) of the shareholding in the holding vehicle. Under the current RETT regime, the remaining more than 5 per cent of the shares in a property owning corporation may be acquired RETT-free by an independent third party (which may be a separate fund managed by the same asset manager), but such structures allowing the RETT free transfer of 100 per cent of the shares in a corporation will no longer be feasible under the proposed new RETT regime.
Apart from RETT considerations, share deals are widely used in large portfolio transactions to simplify the transfer of the properties and to avoid the application of statutory pre-emption rights.
On the buyer's side, a foreign investor may structure the acquisition either directly (as an individual or existing legal entity) or through a foreign or German acquisition vehicle.
If a German property is owned and let by a foreign investor (or a foreign acquisition vehicle), the rental income is subject to German income tax, but no trade tax applies unless a German permanent establishment exists. The property as such does not constitute a permanent establishment.
If the foreign investor wishes to create an acquisition vehicle governed by German law (which is often the case if the investor is a foreign investment fund), the full range of legal entities under German law is available, and the issues of limitation of liability and tax treatment of the acquisition vehicle and the investors are often relevant factors in deciding which form of legal entity is chosen.
One option is to incorporate the acquisition vehicle in the form of a stock corporation (AG) or limited liability company (GmbH), which both provide for limitation of liability. The AG and the GmbH have, however, the disadvantages of not being transparent for income tax purposes and, by virtue of legal form, of being in principle subject to trade tax. Profit repatriations from such corporations are generally subject to German withholding tax, although certain relief may be available if further requirements are met.
Civil law partnerships (GbR) and limited partnerships (KG) have the advantage of being transparent for income tax purposes, and profit repatriations are per se not subject to withholding tax. The GbR, however, has the disadvantage of full liability for all of its partners. Because in a limited partnership only the general partner of the limited partnership is fully liable, the legal form of choice is a combination of both elements: a GmbH & Co. KG is a limited partnership where the general partner is itself a GmbH, i.e. a limited liability company.
As, however, a limited partnership whose general partner is a GmbH, which manages the business of the limited partnership, is by virtue of legal form – like the GmbH – subject to trade tax, additional structures are used to minimise the trade tax liability. In particular, if a German tax-resident acquisition vehicle derives income from trade or business solely because of its legal form, but in fact generates no income other than rental income from its property, trade tax may be avoided by properly structuring the leases. Because in such a case only rental income from the letting of land and buildings is exempt from trade tax, whereas the letting of office or other commercial space often includes fixtures and fittings or appurtenances that may qualify as business equipment of the tenant, the rental income relating to business equipment is not exempt from trade tax and may render the rental income from the letting of the space subject to trade tax as well. It is, therefore, common practice to use a separate vehicle for the acquisition and subsequent letting of business equipment. As this rental income is subject to trade tax in any case, a GmbH is most often used for this purpose. Other structures – such as the use of German limited partnerships where the only general partner is a foreign corporation – which have been quite widely used in the past have come under intense scrutiny especially by German banks and are currently no longer best practice because of uncertainties under German corporate law.
A widely used form for structuring investments in real estate by several investors has been the civil law partnership (GbR). It is expected that its significance will decrease, as it is no longer a permitted legal form for a closed-ended investment fund within the meaning of the KAGB (see Section V.v). It will, however, likely remain important for use by family offices and similar privately organised groups of investors, as investment vehicles set up for such predetermined groups do not fall under the scope of the KAGB.
Since the civil law partnership is generally not registered in any public register, the partners can only be identified from the GbR constitutional documents and through the partnership's authorised representatives – unless the GbR including its partners and the natural persons benefitting from the GbR have to be registered in the 2017 newly established transparency register in case the GbR holds shares of another legal entity. In the past, this often led to difficulties in the land register registration process. The Federal Supreme Court held that if the partners state in a real estate sale and purchase agreement that they are in fact all partners of, and are authorised to represent, the partnership, the land registry is not required or entitled to request further evidence as to the existence, identity and authority of representation of the partnership. The GbR is entitled to be the owner of rights and obligations, be party to legal proceedings and be registered in the land register. The partners of the GbR have to be added in the land register as well.
Generally, no restrictions apply to the acquisition and holding of real estate by foreign investors. This is true for acquisitions by foreign individuals or legal entities, as well as indirect acquisitions through the formation by foreign individuals or legal entities of purchasing vehicles in the form of legal entities governed by German law. The acquisition of land by a non-EU entity may be subject to review by the Federal Ministry for Economic Affairs and Energy if it is part of an investment in a German company that may raise public order- or security-related concerns in certain sectors, e.g. critical infrastructure.
Further, there are no restrictions on the free transferability of funds in relation to providing equity or debt for the acquisition of real estate or repatriation of profits. Foreign investors are naturally subject to generally applicable money-laundering laws. Cross-border money transfers must be reported under the provisions of the Foreign Trade Act and Foreign Trade Regulation for statistical purposes only.
Recent developments regarding the taxation of foreign investment in real estate located in Germany are the introduction of 'real estate corporations' and the waiver of loans relating to German real estate as a taxable event in Germany (see Section VII.iii). Foreign investors should carefully note these developments but not consider them as an obstacle for investment.