The 2021 reform of the German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz or GrEStG) included, among other things, three important changes.
- Under the revised Partnership Rule in §1(2a) GrEStG, the transfer of at least 90% of the interests in a partnership holding real estate located in Germany within a period of ten years to (any number of) new partners triggers RETT. Before the reform, the holding period and shareholding limit were, respectively, five years and 95%.
- A new §1(2b) GrEStG was added. This New Corporation Rule was modelled on the Partnership Rule and provides that a change of the shareholder base in respect of at least 90% of a real estate holding corporation's capital within a period of ten years will trigger RETT, even if no shareholder is controlling the corporation.
- Due to concerns that listed corporations could become subject to RETT every time their shareholder base changed by at least 90%, a new §1(2c) GrEStG introduced an exemption for listed corporations (the Listed Corporation Exemption).
For further details on these changes, see this earlier post. The new rules generally apply from 30 June 2021, subject to certain transitional provisions. This post looks at the guidance issued by the German tax authorities on the new rules.
Decrees on the Partnership Rule and the New Corporation Rule
In mid-2022, the tax authorities of the German states issued an eagerly awaited decree on the New Corporation Rule and revised the existing decree on the Partnership Rule. As expected, the structure of the New Corporation Rule decree is based on the already well-known Partnership Rule decree. Both decrees address similar items and essentially provide for the following:
- For RETT purposes, real estate belongs to an entity's assets if it is attributable to that entity under the GrEStG. This is the case if, at the time the taxable event takes place, the real estate is attributable to the entity on the basis of an acquisition falling within the scope of §1(1), (2a), (2b), (3) or (3a) GrEStG. This approach entails the risk of multiple taxation if real estate is attributable to not only one, but several entities.
- In the event of a shortening of the participation chain, the status as a former shareholder is only retained in case of an indirect shortening of the chain. In case of a direct transfer of a participation or shares in the real estate holding partnership or corporation, the shortening results in a change of the partner or shareholder under the Partnership Rule or the New Corporation Rule.
- The decrees prevent the application of the previously used "change of legal form"-model. The tax authorities’ view is that, where an entity reorganises to change its legal form, all relevant pre-reorganisation changes of partners or shareholders constitute changes of partners or shareholders to be recorded after the reorganisation whereas, prior to the RETT reform, the count was set to zero by a change of legal form.
- According to the tax authorities, the Partnership Rule and the New Corporation Rule are of equal rank and neither takes precedence over the other. This interpretation could have detrimental effects, in particular, in the event of the simultaneous application of both rules which could result in multiple taxation.
- The signing and the closing of a transaction constitute two separate events under RETT law. This is particularly problematic in respect of the so-called unification rule in §1(3) GrEStG (unification of at least 90% of the shares in a real estate holding entity in one hand) and its relationship with the Partnership Rule and the New Corporation Rule since the dates of taxation diverge. The unification rule applies as at the time of signing, whereas the Partnership Rule and the New Corporation Rule apply as of closing, i.e., on the transfer of the relevant interest or shares. However, pursuant to the decrees, the competent tax office may refrain from assessing RETT pursuant to the unification rule if a taxable event under the Partnership Rule or the New Corporation Rule (i.e., closing) occurs within a period of one year. In any case, an assessment under the unification rule shall be made subject to review and shall be revoked or amended once a notice pursuant to the Partnership Rule or the New Corporation Rule can be issued.
- Another significant change is the tax authorities' renunciation of the so-called perpetuity clause which has been criticized in the literature for a long time. Thus, in the case of an indirect change of shareholders in a corporation, which in turn holds shares in a real estate holding partnership or corporation, the customary ten year period applies.
The revised decree on the Partnership Rule is to be applied in all open cases. For transactions prior to 1 July 2021 or those falling under the transitional provisions of § 23(19) and (20) GrEStG, the decree applies with the proviso that the (old) 95% threshold and a five year period are to be used.
Decree on the Listed Corporation Exemption
Recently, the tax authorities of the German states issued another decree on the Listed Corporation Exemption. According to this decree, the scope of the Listed Corporation Exemption is narrow and forces all listed corporations holding real estate located in Germany to comprehensively monitor their share movements. IPOs, share issues resulting from capital increases and securities lending, borrowing and repurchase transactions are not share transfers covered by the Listed Corporation Exemption. The decree does not address indirect transfers or shareholders' transfers in the case of physically replicating ETFs.
With respect to the "listing" requirement, the decree states that:
- The exemption requires a listing on a stock exchange authorized under the German Securities Trading Act (or certain equivalent EU/EEA/other stock exchanges) (so-called organised markets) and applies only to trades concluded there.
- Outside the EU/EEA, only regulated markets in the U.S., Australia and Hong Kong are accepted as equivalent organised markets. This means that trades concluded, for example, on the SIX Swiss Exchange or the London Stock Exchange would fall outside the Listed Corporation Exemption.
- In Germany, the regulated market on an exchange qualifies as an organised market. But multilateral trading systems like curb trading (Freiverkehr) as well as over-the-counter trading do not constitute an organized market.
- Hence, shares of, for instance, UK or Swiss stock corporations, which are listed on a market abroad, but in Germany (or an EU/EEA state or an equivalent country) only on the open market, are therefore excluded from the application of the Listed Corporation Exemption.
Fortunately, the decree clarifies that no notification obligation is present if, as a result of the application of the Listed Corporation Exemption, the required threshold of 90% is not reached for the purposes of the Partnership Rule or the New Corporation Rule.
Despite the issuance of the three decrees, RETT remains a complex area of German tax law with numerous open queries. Hence, one would hope that the German tax authorities issue further guidance to clarify matters. However, rumour has it that the tax authorities are rather working on a complete overhaul of the German RETT law, i.e., the RETT reform reloaded.