An agreement proposal of the conciliation committee (Vermittlungsausschuss), adopted on June 5, 2013, for the Law Implementing the Administrative Cooperation Directive and to Change Tax Provisions (Administrative Cooperation Directive Implementation Act – “AmtshilfeRLUmsG”) received the consent of the German Federal Parliament (Bundestag) on June 6, 2013 and of the German Federal Council (Bundesrat) on June 7, 2013. This AmtshilfeRLUmsG now finally also includes the long-planned legal change to the real estate transfer tax law in order to prevent so-called “RETT-Blocker” structures. The wording that had already been drafted during the deliberations for the (failed) Annual Tax Act 2013 was used without changes. In return to this tightening of the law, the possibilities for real estate transfer tax neutral intra-group restructurings pursuant to Section 6a GrEStG were extended. The real estate transfer tax rules come into effect on the day after the law is promulgated, i.e. already on the day after the Federal Parliament‘s resolution and accordingly for acquisitions realized from June 7, 2013.
“Old” Rett-Blocker Structure
Under the old legal situation, only the direct change of the legal owner of domestic real properties (Section 1 paragraph 1 and 2 GrEStG) and the transfer of interest in partnerships and corporations holding real properties (Section 1 paragraph 2a and 3 GrEStG) constituted an event, which is generally subject to real estate transfer tax.
For cases where interests in partnerships and corporations are combined in accordance with Section 1 paragraph 2a and 3 GrEStG, the evaluation under the old rule was exclusively based on civil law, where the joint right of the (direct or indirect) shareholders/ partners to the company‘s assets was decisive. The evaluation had so far not been based on an economic perspective.
Under these rules, the following structure was regularly implemented in order to avoid real estate transfer tax from accruing in the case of a (partial) change of shareholders/partners (so-called “RETT-Blocker” structure). In the case of such a RETT-Blocker structure, an Investor acquired up to 94.9 percent of the shares in a corporation holding the domestic real estate (Immobilien GmbH). The remaining shares were held by a partnership (Co-Invest KG). In the partnership, the Investor again held up to 94.9 percent and a (third-party and independent from the Investor) Co-Investor held the remaining interests of 5.1 percent .
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In this (simplified) basic structure, no real estate transfer tax accrued under the old legal situation. Because first of all, no direct change of the legal owner of a domestic real estate exists pursuant to Section 1 paragraph 1 GrEStG, because from a civil law perspective, the acquisition of shares in the company holding the real estate cannot be equated to the acquisition of civil law ownership of the real estate. Also, only the Immobilien GmbH itself is entitled to realize the real estate and accordingly no taxable event pursuant to Section 1 paragraph 2 GrEStG exists either.
Finally, the event is not taxable pursuant to Section 1 paragraph 3 GrEStG, since the Investor does not acquire at least 95 percent of the shares in the Immobilien GmbH. Under the old legal situation, the 5.1 percent participation in the Co-Invest KG (94.9 percent of 5.1 percent) was not attributed to the Investor either. Because the real estate could only be attributed to the member of the interposed partnership, if all shares in a partnership are to be attributed to a member. Any economic perspective beyond this was ruled out.
New Rule of Economic Combination of Shares
In order to combat the described RETT-Blocker structures, the following new subsidiary rule for cases of share combinations is inserted under Section 1 paragraph 3a GrEStG:
“To the extent that taxation under paragraph 2a and paragraph 3 is out of the question, a legal event is also deemed a legal event in the sense of paragraph 3, based on which a legal entity directly or indirectly or partially directly, partially indirectly holds an economic participation in an amount of at least 95 percent in a company, the assets of which include domestic real estate. The economic participation results from the sum of the direct and indirect participations in the capital or in the assets of the company. In order to determine the indirect participations, the percentages in the capital or assets of the companies shall be multiplied.”
Thereby, an “economic participation” was introduced into real estate transfer tax law. The new rule creates a fictitious combination of shares or interests in the sense of Section 1 paragraph 3 GrEStG, if an economic participation of at least 95 percent is held directly or indirectly in the company holding the domestic real estate.
Taking into account this new rule, the implementation of the previously customary RETT-Blocker structure is subject to real estate transfer tax, since, as described, Section 1 paragraph 3a GrEStG is not based on the civil law perspective, but applies the accrued amount of the indirect and direct participation. Accordingly, the amounts of the interests in the capital or the assets of the respective companies have to be multiplied pursuant to Section 1 paragraph 3a sentence 3 GrEStG in order to determine the indirect participation. The Investor, who holds 94.9 percent in Immobilien GmbH directly and 4.84 percent (94.9 percent of 5.1 percent) indirectly via Co-Invest KG, thus holds 99.74 percent (economically), i.e. at least 95 percent of the shares in Immobilien GmbH.
Criticism and Outlook
The statutory rule that was now adopted corresponds to the original wording that was part of the (failed) Annual Tax Act 2013. The criticism expressed previously thus continues to apply.
The new rule has, for example, a very wide scope of application. Constellations and structures might also be included now, which were not meant to serve the avoidance of real estate transfer tax and were specifically not meant to fall into the scope of application of the parallel provisions in Section 1 paragraph 2a and 3 GrEStG. It is unclear, for example, if shortening the participation chain leads to a combination of shares pursuant to Section 1 paragraph 3a GrEStG. Under the old legal situation, the mere strengthening of an already existing indirect share combination did not lead to a taxable event. The same applies in the case of an increase of existing participations. The real estate transfer tax consequences of intra-group restructurings also raise questions, if the reservation periods of the exemption provision of Section 6a GrEStG are not met.
In addition, the terminology of the provision itself is partially unclear. It is accordingly particularly questionable, whether the term of economic participation also includes rights that are similar to participations or other obligatory elements (such as e.g. typical and atypical silent participations, profit participation rights, option rights, and profit participation loans). Generally, it should be possible to assume that Section 1 paragraph 3a sentence 2 and 3 GrEStG define the term of economic participation with “participation in the capital or assets of the company” conclusively and that the aforementioned similar rights are not included.
Since these issues, which had already been criticized previously, were not taken into account during the legislative process, it would at least be desirable, if a statement or clarification from the tax authorities concerning the unclear issues would be published soon. This applies in particular in respect to the fact that the individual federal states currently pursue an increase of the respective real estate transfer tax rates and since both domestic and foreign investors have an increased interest in legal clarity in order to choose potential structuring alternatives or take corresponding expenses for real estate transfer tax into account in their investments.