A far-reaching reform of the German real estate transfer tax (RETT) rules has been proposed which, if implemented, is intended to apply to transactions that take place after 31 December 2023.  In July 2023, the German Federal Ministry of Finance (BMF) circulated a discussion draft for another reform of the German Real Estate Transfer Tax Act (GrEStG). 

A civil law reform (German Act to Modernize the Law on Partnerships (MoPeG)) will fundamentally change the legal treatment of partnerships as of 2024. This may also require changes to the GrEStG, in particular to the (partial) exemption rules for real estate transfers between partners and their partnership. Surprisingly, the BMF took the opportunity to propose fundamental amendments to other provisions of the GrEStG as well. The discussion draft provides for a comprehensive reform of the taxation of so-called share deals as well as substantial changes to the granting of tax benefits for restructuring within a group and for real estate transfers between companies and their shareholders. A large part of the draft is based on a proposal for the modernization of RETT law, which has lately been discussed among experts.

Taxation of share deals for RETT purposes

According to the discussion draft, a new § 1a GrEStG would be introduced, and all share deals would be taxed uniformly (irrespective of the legal form of the entity holding the German real estate) if there is a transfer or reorganization of the entirety (i.e., 100%) of the shares in an entity holding German real estate. The current share deal provisions stipulated in § 1(2a) through (3a) GrEStG (see our previous post) would be repealed. Consequently, the observation period (currently ten years) and the fixed participation quota (currently 90%) would no longer be required.

RETT blocker structures would be prevented by introducing the concepts of an "acquiring group" and a "serving interest":

• Acquiring group: Instead of a single purchaser of shares, a group of purchasers consisting of several persons may also be taxed if such "acquiring group" acquires the entirety of the shares through coordinated transactions. Such acting in concert would be assumed in the event of a factual or time-wise connection of the share transfers.
• Serving interest: In addition to treasury shares held by the real estate holding company, shares held by a third party in the interest of the acquirer or the acquiring group would be disregarded when determining the total number of shares. The draft contains several examples for such 'serving interest' of a person (e.g., in the case of limited shareholder rights or the agreement of fixed or minimum remuneration).

The recently introduced § 16(4a) GrEStG pursuant to which both signing and closing need to be properly notified in order to not trigger RETT twice (see our previous post on this topic) will be repealed as well.

Attribution of real estate for RETT purposes

The draft also provides for new provisions on the currently heavily discussed question as to which company the respective German real estate is to be attributed in a multi-tier structure. In principle, this is to be only the entity that last acquired the real estate in the context of a transaction within the meaning of § 1(1) GrEStG, although an attribution is also feasible to an entity that holds the power of disposition of the real estate pursuant to §1(2) GrEStG (in this event, double attribution). The envisaged provisions would essentially implement the recent case law of the Federal Fiscal Court in this regard.

New liability for the company holding German real estate

In order to safeguard the relevant tax revenue, a personal liability of the real estate holding entity and a liability in rem of the real estate are to be introduced. The tax authorities may hold the entity holding German real estate liable in the event of an incomplete or untimely notification of the transaction. Additionally, RETT would rest as a public charge on the real estate attributable to the real estate holding entity.

New rules for investment fund structures holding German real estate

In addition, pursuant to a new § 1b GrEStG, certain investment funds in contractual form would be treated as real estate holding companies and therefore be included in taxation if German real estate is attributable to them at the time of the realization of a transaction. This concept is in contrast to current rules under which either only the asset manager which owns the real estate from a civil law perspective or the individual fund investors are relevant for RETT purposes. In essence, this would result in a significant change for fund investors as they would have to consider triggering RETT when transferring units in a contractual fund holding German real estate. Further, real estate would also be attributable to a contractual fund if it is only held on behalf of the latter, for instance by the asset manager to which the real estate might also be attributable. This bears the risk of a double attribution.

Transfers within a group

The previous RETT exemptions for real estate transfers between partners and a partnership as well as the exemption for certain intra-group transfers would be replaced by new provisions:

• Intra-group transfers: Transactions would be RETT-exempt if the decisive influence of a person over the real property does not change as a result of the transaction. Decisive influence is deemed to exist if the real estate is attributable to the entity or – in a chain of shareholdings – the relevant entity (directly or indirectly) holds all the shares in the entity holding the real estate. Therefore, transfers within a wholly-owned group should be exempt in many cases, irrespective of the type of transfer (asset or share deal, purchase agreement or reorganization) or legal form of the entities involved.
• Transfers to a joint ownership: RETT on transfers of real estate from several co-owners or a sole owner to their entity would be (partially) not levied – irrespective of the legal form of the entity. The prerequisite for such privileged treatment is the observance of a five-year holding period.
• Transfers from a joint ownership: Conversely, a (partial) exemption would also apply to transfers of real estate from an entity to its shareholders. Again, a five-year holding period must be maintained.

Outlook / Timing

The discussion draft contains various substantial amendments to the GrEStG, which is particularly astonishing in light of the fact that the law was last amended as recently as 2021 and those amendments had been discussed for years. The proposed RETT reform is intended to come into force on 1 January 2024 and the new provisions would apply to transactions that take place after 31 December 2023. However, it remains to be seen how the discussions between the federal and state governments as well as within the federal government will proceed, and whether this rather far-reaching reform has a chance of being implemented as proposed and in a timely manner.