Finance ministers of federal states recommend tightening real estate transfer tax rules for share deals
On 21 June 2018 the Länder finance minister conference recommended a clear tightening of real estate transfer tax rules for transfers of shares in real estate-owning companies and called on the Federal Ministry of Finance to draft a bill incorporating its recommendations.
Up to now, transfers of shares in real estate-owning corporations have been able to benefit from certain real estate transfer tax advantages. Among other things, it is possible to transfer all the shares in a real estate-owning corporation without triggering any real estate transfer tax provided that the shares are purchased by two non-affiliated acquirers and neither of them purchases 95% or more of the shares. A main investor can, for instance, directly or indirectly purchase 94.9% of the shares and a co-investor 5.1% (known as RETT blocking). Moreover, by staggering the acquisition of the shares in a real estate-owning partnership the real estate transfer tax can be significantly reduced: If an acquirer purchases 94.9% of the shares in a real estate-owning partnership in a first step and then the remaining 5.1% after five years, real estate transfer tax is only payable on the latter transaction. Lastly, transfers of property between partnerships and their partners are partially exempted from real estate property tax if holding periods of five years are observed.
2. Finance minister conference recommendations – an overview
The Länder finance minister conference recommended a number of changes to the real estate transfer tax rules aimed at significantly restricting the tax planning arrangements available for share deals. It recommends the following changes in particular:
- Reduction of the threshold from the current 95% to 90%;
- Extension of the holding periods from the current five years to, as a rule, ten;
- Creation of a new rule for a change to the shareholders of a corporation; and
- Introduction of interest on real estate transfer tax claims / increase of limit on default interest.
3. Finance minister conference recommendations – in detail
a. Reduction of the threshold from the current 95% to 90%
The Länder finance ministers recommend lowering the 95% threshold provided for in section 1(2a), 1 (3) and 1 (3a) Real Estate Transfer Tax Act to 90%, as a result of which the following transactions in particular would, in the future, be subject to real estate transfer tax in relation to real estate-owning corporations/partnerships:
- The direct or indirect transfer of at least 90% of the shares in a partnership to new partners (for the relevant time periods, see point b.).
- The conclusion of a legal transaction that results in a claim for the direct or indirect transfer of shares in a partnership or a corporation if the transfer leads to the consolidation of at least 90% of the shares or if at least 90% of the shares are transferred to the acquirer.
- The direct or indirect transfer of shares in a partnership or a corporation if it results in the consolidation of at least 90% of the shares or if at least 90% of the shares are transferred to the acquirer.
- The acquisition of an economic interest of at least 90% of the shares in a partnership or a corporation.
b. Extension of the holding periods from the current five years to, as a rule, ten
Under the current rules set out in sections 5 and 6 Real Estate Transfer Tax Act, the transfer of shares in real estate-owning partnerships, as well as of property between a partnership and its members, is subject to a holding period of five years. The finance minister conference recommends extending this holding period to, as a rule, ten years, with an extension to 15 years in certain cases. Extending the holding periods, together with lowering the 95% threshold to 90%, is in particular intended to make staggered acquisitions of 100% of the shares in a real estate-owning partnership unattractive: In future it would only be possible to purchase 89.9% in a first step. Only after ten years have elapsed would new partners be able to acquire the remaining 10.1% without triggering real estate transfer tax. If the acquirer of the 89.9% also acquires the remaining 10.1% itself after the ten years have elapsed, then real estate transfer tax would only be incurred on that 10.1%.
c. Creation of a new supplemental rule applying to changes in the shareholders of corporations
To date, it has been possible for two non-affiliated acquirers to purchase 100% of the shares in a real estate-owning corporation directly or indirectly (e.g. 94.9% by a main investor and 5.1% by a co-investor) without real estate transfer tax being incurred. In the future, a new supplemental rule would also cover a change in the shareholders of a real estate-owning corporation pursuant to the proposed section 1(2b) Real Estate Transfer Tax Act: Thus, a transfer of at least 90% of the shares in the real estate-owning corporation to new shareholders within a ten-year period would be subject to real estate transfer tax. The new supplemental rule would in particular make it impossible for 100% of the shares in a corporation to be acquired with the participation of a co-investor without triggering real estate transfer tax. As a first step, a maximum of 89.9% of the shares could be acquired. The seller would then have to hold at least 5.1% or 10.1% of the shares for ten years before they could be transferred without triggering real estate transfer tax.
However, the exemptions provided for in sections 5 and 6 Real Estate Transfer Tax Act for the transfer of property between a partnership and its partners would not apply under the new supplemental rule.
d. Introduction of interest on real estate transfer tax claims / increase of limit on default interest.
Under the current rules, there is no interest on real estate transfer tax claims (cf. section 233a German Fiscal Code (AO)). The Länder finance ministers now recommend that interest of 0.5% per month/6% per year be charged on real estate transfer tax claims, as is the case with other tax claims. Interest will already begin accruing three months after expiry of the two-week period for giving notice of fulfilment of the relevant criteria for payment of real estate transfer tax.
Moreover, the Länder finance ministers suggest assessing whether the current maximum limit of EUR 25,000 for default interest (cf. section 152(10) German Fiscal Code) should be replaced by a higher limit.
If implemented by the legislator, the recommendations made by the Länder finance minister conference would significantly restrict the common real estate transfer tax structures of share deals. An extension of the holding periods to ten years could be expected to have substantial effects on the market, since this would most likely exceed the investment period of many investors. Additionally, the planned supplemental rule for the acquisition of shares in corporations would constitute a tightening of the current provisions, since a seller would have to retain at least a 10.1% interest for a period of at least ten years in order not to trigger real estate transfer tax.
Currently, it is not yet clear whether or to what extent the legislator will implement the recommendations of the Länder finance minister conference. However, given the current political climate, it is to be assumed that it will go along with most of the recommendations. It is also unclear from which point in time the provisions will take effect and to what extent the legislator would provide for grandfathering. Therefore, when structuring share deals these recommendations should at any rate be taken into account already before any changes are made to the statutory provisions. We would be happy to assist you in this regard.