At the meeting of the finance ministers of the individual federal states held on 21 June 2018 in Berlin, the discussion around applying real estate transfer tax to share deals entered a new phase. The finance ministers agreed the following measures:
- Creation of a new tax liability for companies: The current legal position is that any change of partners in a real estate-owning partnership involving 95% or more of the shares in the partnership's assets within a five-year period triggers a tax liability. An individual partner does not need to exceed a certain shareholding threshold in this context (consolidation of shares is not required); rather, the transfer of 95% or more to "new partners" results in a tax liability. In future, this provision will also apply to a change of shareholders in real estate-owning companies. An existing shareholder must therefore retain a corresponding stake even if a corporation is the holding vehicle.
- Lowering of the shareholding level: In all the additional cases in which a tax liability arises, the relevant level of shareholding will be lowered from 95% or more to 90% or more of the shares. The basis for assessing real estate transfer tax remains the entire value of the property.
- Extension of time periods from five to ten years: The current five-year periods laid down in the provisions of the Real Estate Transfer Tax Act (Grunderwerbsteuergesetz) will be extended to ten years. Up until now, share deals were structured such that initially 94.9% of the shares in the partnership's assets were transferred to a new partner. After five years had elapsed, the remaining 5.1% were also transferred to the partner. With all five-year periods now being extended to ten years, the remaining 5.1% may only be transferred to the new partner after waiting ten years. During that period, the entity is bound by the arrangements made and therefore constrained in its freedom of action.
The tax department heads at the federal and state ministries of finance are now tasked with turning these proposals into legislative texts as a matter of urgency. The Ministry of Finance will then introduce the texts into the legislative process.
The proposed changes are primarily of relevance for conventional property share deals. However, they could also affect the real estate transfer tax liability of company transactions, or restructuring under corporate law, if German real estate is indirectly involved.
If the announced changes to the law are implemented, the impact on future share deals would be that the seller (or another minority shareholder) must retain a stake of more than 10% in the real estate vehicle for a period of at least 10 years. Due to the extension of the tax liability for changes of partner/shareholder, this would apply both to companies and to partnerships. No changes have been announced in relation to the options for structuring this remaining minority stake.
At the same time, the aim of preventing a unification of shares remains relevant. Based on the proposals, however, the presence of an "existing shareholder" will now always be required, including in the case of companies. This means it would no longer be possible to acquire 100% of the shares immediately via co-investment structures without real estate transfer tax being incurred.
The proposed extension of taxation to include shareholder changes in companies represents a paradigm shift in real estate transfer tax law. The extension raises the practical issue as to whether the tax exemptions provided in sections 5 and 6 of the Real Estate Transfer Tax Act (GrEStG) will also apply to companies in future, in order to avoid unequal treatment of partnerships and companies. Up until now, these tax exemptions have required the involvement of partnerships. If the tax exemptions set out in sections 5 and 6 of the GrEStG are not extended, the subsequent acquisition of the 10.1% share after 10 years by an 89.9% company shareholder would always be fully liable to tax, while an 89.9% tax exemption would generally apply in the case of a partnership.
The details of the amendments will not be known until the draft legislation is presented. It is to be hoped that rather than testing the limits of constitutional law, lawmakers will avoid any retrospective effect.
With regard to any share deal projects currently under consideration, careful attention should be paid to the course of the legislative process and the intended amendments should be taken into account when structuring the deal.