In our client alert dated 14 May 2019 we outlined the German government’s planned changes to the German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz – GrEStG) that will affect share transactions involving property owning companies. As a next step in the legislative process, on 31 July 2019 the German Government published the draft act as government draft (Regierungsentwurf).
The draft is based on the former draft of the German Ministry of Finance published on 8 May 2019.
The government draft does not introduce material changes to the original ministerial draft. In summary, once enacted the new law would lead to the following changes:
- Reduction of the “equalization threshold” from 95% to 90% – real estate transfer tax (RETT) will, in future, be triggered if at least 90 % of partnership interests in a property holding partnership, or shares in a property holding corporate entity, are transferred within the applicable cooling period.
- Extension of “change of ownership rule” to corporate property entities – RETT will be triggered if 90 % or more of the shares in a property holding corporate entity (e.g., a German GmbH or Luxembourg S.à r.l.) are transferred to new shareholders within the applicable cooling period.
- Extension of the cooling period from 5 to 10 years for share deals involving either property holding partnerships or corporate entities.
Although comments from the industry following the publication of the ministerial draft suggested otherwise, the government draft still does not include an exemption for share transfers in property holding companies owned by listed industrial groups. Therefore, any such group that owns property in Germany may struggle to assess future RETT implications if their shares are traded on stock exchanges. In addition, the new draft does not revise the planned 15-year holding period for a consolidation of property holding partnerships with a materially reduced RETT exposure (which would lead to an increase in the holding period, from 5 years under the current law to 15 years).
The government draft still provides for enactment of the new law on 1 January 2020. Interestingly, the provisions of the new rules regarding share deals have now been extracted from the 2020 annual tax act which, among others, includes tax incentives for e-mobility in Germany. The reason might be that the government does not want the timing for the introduction of such tax incentives to be jeopardised by potential delays in the legislative process caused by discussion of the RETT reform.
For transactions falling within the transition period (see our client alert of 14 May 2019), the date that the draft act is presented to the German Federal Counsel (Bundesrat) is now significant. Provided the new law comes into effect, if a share transaction is signed before that date and closed within one year, it may still be closed on the basis of the current law. We expect that the government draft will be presented to the Federal Counsel in the near future. Therefore, the prompt signing and closing of transactions, if possible, will allow companies to benefit from the current law.
At the moment it is difficult to predict how the Federal Counsel will respond to the government draft and, indeed, if and when the new rules will come into effect.