The German Federal Ministry of Finance recently unveiled a long-awaited draft bill for reform of the German Real Estate Transfer Tax (RETT) Act. This would substantially broaden the scope of the German RETT provisions regarding the taxation of share deal transactions.

Under the law as it currently stands, RETT is triggered in the following cases:

1. transfer of at least 95% of the shares in a real estate-holding partnership (but not a corporation) within five years to (any number of) new shareholders upon completion of the transfer ("New Partnership Rule");
2. unification of at least 95% of the shares in a real estate-holding company (partnership or corporation) in the hands of a single owner or a group of related shareholders ("Unification Rule");
3. holding of an economic participation of at least 95% in a real estate-holding company (partnership or corporation) in the hands of a single owner ("Economic Participation Rule").

But the current law is viewed as being prone to circumvention: the New Partnership Rule can be avoided by having the purchaser initially acquire a 94.9% interest, whilst the selling partner remains in the partnership with its 5.1% partnership interest until the expiry of the five year watching period. The Unification Rule and the Economic Participation Rule can be avoided by simple co-investment structures in which an unrelated co-investor acquires 5.1%.

The draft bill closes these perceived loopholes by a variety of legislative measures, notably:

• lowering the relevant threshold of 95% to 90% in many cases
• extending the general watching period from five to ten years
• introducing a new provision, modelled on the Partnership    Rule, which will extend its scope to corporations ("New Corporation Rule")

Under the New Corporation Rule, an exchange of the shareholder base of property-owning corporations of at least 90% of the company’s capital within a period of ten years will trigger RETT, even if there is no single or group of related shareholders who eventually control the real estate owning company.

It will also be difficult to monitor the New Corporation Rule or enforce it with respect to real estate owning subsidiaries of publicly listed companies whose shareholder base is subject to constant change. This is heavily criticized by practitioners.

The amended rules generally take effect from 1 January 2020 onwards. For the purposes of the watching period under the New Corporation Rule, transactions before 2020 may be considered.

It remains to be seen how these draft measures will progress through the legislative stages. For the time being, however, the draft bill should form the basis of any tax planning considerations. It might even be worthwhile accelerating envisaged transactions in order to come under the current, more beneficial rules. For the New Corporation Rule, this would require not just the signing but also the closing of the transaction.

For further information, please visit

https://www.hengeler.com/de/service/newsletter/newsletter-2019-05/