Under the current tax rules, RETT (German Real Estate Transfer Tax) is being triggered if at least 95% of shares in a company holding real estate are being consolidated directly or indirectly in the hand of one shareholder. Up to now it was possible to avoid RETT by using a second, intermediary company purchasing more than 5% of the shares in the property holding company (so called RETT-Blocker structure). On June 6 and 7, the German Bundestag and Bundesrat passed an amendment to the RETT Act making such structures tax-ineffective. However, this amendment does not only effect the RETT-Blocker structures, according to the amendment RETT would also be triggered in many cases where a taxation would not be justified and the possibility of a misuse of tax rules seems rather distant.
According to the tax rules up to now, RETT is being triggered if at least 95% of shares in a company holding real estate are being consolidated directly or indirectly in the hand of one shareholder. However, an investor was able to increase his economic participation in the respective real property without triggering RETT, if less than 95% of the shares are held directly und the remaining shares are held indirectly and through a separate entity, in which the purchaser again holds less than 95% of the shares.
The shares held by the second entity were not being attributed to the major shareholder from a RETT perspective as long as such investor held less than 95% of the shares in this second entity (RETT shareholding threshold).
In case a partnership was used as the second entity, the investor was by principle even able to raise his economic participation in the real property to 100%.
Amendment to the RETT Act
The current amendment to the RETT Act aims on making these RETT-Blocker structures ineffective by implementing a catch-all clause to the RETT Act which, contrary to the situation so far, does trigger RETT dependent on the mere economic participation of an investor in the property holding entity. This economic participation shall be determined from the amount of direct or indirect shareholding and / or interest in the assets of the company. Furthermore, the otherwise applicable 95% shareholding threshold for the attribution of indirect shareholdings shall be disregarded by the proposed catch-all clause: Hereby, all indirect shareholdings are taken into account proportionately to determine the economic participation and not only shareholdings of at least 95% of the shares.
The amendment is applicable to all transactions carried out after the June 6; it does not affect transactions carried out before this day.
Significant Consequences also beyond criticized RETT-Blocker structures
The passed amendment does not only make the RETT-Blocker structures tax-ineffective, now RETT will also be triggered in many cases where a taxation seems not to be justified and the possibility of a misuse of tax rules seems rather distant. This newly introduced “economic perspective” and waiving the 95% shareholding threshold cause severe frictions. Some examples to illustrate the inappropriate effects of the amendment:
Acquisition of minor shareholdings and Intra-Group restructurings
By waiving the 95% shareholding threshold, even the indirect acquisition of minor shareholdings could trigger RETT according to the newly introduced “economic perspective”. Even minor increases of shareholdings in companies abroad, many levels of shareholding above the property holding company could then cause a significant tax burden.
Though some relaxations regarding RETT for intra-group restructurings have been passed with the same bill, these relaxations do only apply to restructurings according to the German Reorganization Tax Act or e.g. shareholder contributions and not to an acquisition of shares in other group entities.
It is yet not clear how the amendment will affect the transfer of silent participations in property holding companies. According to the new rule, a silent partner holding a participation of at least 95% in the company’s assets who transfers his silent participation to a new investor would trigger RETT.
Alternative Tax Structuring
In future, the acquisition of property holding companies should be carried out jointly with an independent co-investor, which acquires at least 5.1% of the shares of the target in order to avoid triggering RETT.
As the distribution of voting rights among the shareholders is not taken into account for RETT purposes, all voting rights could then be held by the major investor by virtue of a voting trust without triggering RETT. The same applies to the dividend rights, so it would not be disadvantageous from a RETT perspective if only such major shareholder would be entitled to dividends. It remains to be seen whether it will still be possible to avoid RETT by granting a silent partnership to an investor.