The reform of the German Real Estate Transfer Tax (RETT) Act took a decisive step towards implementation. Since the RETT reform focuses on share transactions relating to all corporations and partnerships owning German real estate, this is relevant for a great number of M&A transactions and corporate restructurings.
Main points of the German RETT reform
After more than two years of discussions, the main points of the May 2019 draft proposal (see the previous blog posts from May 2019 and September 2019) are to be enacted almost unchanged. The finance committee of the German parliament has this week passed an amendment proposal which is expected to be adopted in the German parliament (Bundestag) on 21 April 2021 and in the second chamber (Bundesrat) on 7 May 2021. The proposal is, from a conceptual point of view, generally in line with the previous draft bills.
The main points of the German RETT reform are:
- The relevant threshold for the taxation of share deal transactions will be lowered from 95% to 90%. This means that under the already existing provisions which provide for the taxation of share deal transactions, RETT will be triggered in the future upon the occurrence of one of the following events:
- the transfer of at least now 90% of the shares in a real estate-holding partnership (but not a corporation) within a fixed number (now ten) years to (any number of) new shareholders upon completion of the transfer (New Partnership Rule),
- the unification of at least now 90% 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), and
- the holding of an economic participation of at least now 90% in a real estate-holding company (partnership or corporation) in the hands of a single owner (Economic Participation Rule)
- All existing (i.e., not yet expired) watching periods of five years shall now be extended to ten years. This applies to:
- the New Partnership Rule mentioned above, and
- certain exemption provisions for transactions within partnership structures
- At the core of the reform act is the introduction of a "New Corporation Rule" which is modelled after the existing New Partnership 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 shareholder or group of related shareholders who eventually control the real estate owning company. This means that only an existing shareholder can act as a so-called RETT blocker by remaining invested with more than 10%.
Exemption for transactions on authorized stock exchanges
On the positive side of the new proposal it does – contrary to previous draft bills – provide for an exemption for stock exchange transactions in shares of listed companies. There had been concern that under the New Corporation Rule publicly listed companies could become subject to RETT every time their shareholder base changed by 90%. This would have put companies without a stable anchor shareholder with a permanent minimum stake of more than 10% clearly at a disadvantage and there were serious and justified concerns both how taxpayers (i.e., the publicly listed companies) could monitor it and how tax authorities could enforce it in practical terms. The exemption for listed companies brings the much desired relief. However, the exemption requires a listing on stock exchanges authorized under the German Securities Trading Act (or certain equivalent EU/EEA/other stock exchanges) and applies only to trades conducted there. OTC transactions will not be covered.
Scope and application
The fact that the changes will not take effect retroactively but only apply to transactions occurring after 30 June 2021 has also been positively received. Still, there are some nuances, and it should be carefully considered in each case whether the new rules may still be relevant for previous or pending transactions. This holds particularly true in the following cases:
- Transactions signed before 1 July 2021 but only closed afterwards will be subject to the new rules.
- For the purposes of the watching period under the New Partnership Rule, only transactions which are still within the five year watching period (i.e., such after 1 July 2016) shall be considered under the new rules, older transactions are not to be considered. For the purposes of the watching period under the New Corporation Rule, transactions before 1 July 2021 may not be considered at all which is a change compared to the principles of the May 2019 draft.
- For structures in which an investor had already crossed the now applicable 90% threshold when the new rules apply, but fell short of the old 95% threshold, a "windfall profit" should be avoided and the old regime still applies: RETT is triggered if such investor increases its share above to 95%.
Valuation and outlook
The new rules will substantially broaden the scope of the taxation of share deal transactions. It will also become more complex to avoid RETT in the future by setting-up joint investment structures not only because the threshold is reduced to 90%, but also (and even more so) because the New Corporation Rule now also captures the exchange of the shareholder in cases in which no single investor reaches the 90% threshold. However, it can be seen as a success from the taxpayer's perspective that claims for an even further extension of taxation rights – most notably a lowering of the threshold to only 75% as demanded by the Social Democrats – were dismissed. The fact that the new rules remain, from a conceptual point of view, essentially in line with the existing system of the taxation of share deal transactions, should provide investors in the foreseeable future at least with a reasonable level of legal certainty.
The new rules will substantially broaden the scope of the taxation of share deal transactions.