• Christoph Frey, Director |

The EU has denied Switzerland stock market equivalence. As an indirect consequence of this, listed Swiss real estate funds and companies will have to pay transfer taxes on their real estate investments in Germany if at least 90% of their shares change hands within 10 years.

Reform of the real estate transfer tax regarding share deals in Germany

Starting 1 July 2021, the transfer tax on German real estate (similar to Switzerland’s ‘Handänderungssteuer’) is expected to also be levied if at least 90% of the shares in a corporation that owns real estate change hands, directly or indirectly, within a rolling 10-year time frame. The aim of this reform to German law is to put a stop to tax avoidance structures. Until now, real estate share deals, unlike asset deals, could be structured in such a way that the real estate transfer tax – set at between 3.5% and 6.5% of the purchase price depending on the location or federal state – did not apply. To accomplish this, a co-investor, who was neither indirectly nor directly controlled by the buyer, would hold a minimum share of 5.1% (for example). Artificial structures were then developed in practice with the purpose of saving on tax. The current German real estate transfer tax reform, which is close to being passed, is designed to negate these structures (the German Bundestag adopted the measures on 21 April 2021). As such, it will no longer be possible to acquire all shares of a company immediately by involving a co-investor without paying real estate transfer tax. The collateral damage resulting from this change may, however, prove to be immense, as the new regulations could also affect every industrial company that happens to own real estate. This consequence will be mitigated to an extent by the introduction of a stock market clause. Transfers of shares and fund shares that take place on certain stock markets or at other trading venues will not count and will not trigger the real estate transfer tax.

Listed investment vehicles

The fact that the respective real estate companies will be liable to pay tax when their shares (indirectly) change hands means that these companies will have increased obligations regarding disclosure and the provision of information. Over the last few months, however, it has become clear that listed real estate funds and companies have only limited scope to accurately check for changes in the ownership of shares over a period of 10 years, and that a revision of the draft law was therefore required. The stock exchange clause was added to the draft legislation accordingly (section 1, para. 2c, GrEStG). It was recognized that the aim of the reform cannot be to have e.g. real estate funds repeatedly pay the transfer tax over the course of their ownership of a real estate simply because the fund’s shares regularly change hands.

Nonetheless, the stock market clause only covers real estate funds and companies that are listed on the stock market in an EU or EFTA country or at a stock exchange that is based in a third country which has been declared equivalent by the European Commission. As is well known, the EU denied Switzerland stock market equivalence as part of the disputes surrounding the framework agreement with the EU.

Investment vehicles listed in Switzerland set to lose out

As a consequence of this legal reform, real estate funds and companies that are listed in Switzerland but also any other entities that cannot apply the exemption could soon face potentially hefty transfer tax bills on a regular basis while they own real estate in Germany. Besides these additional costs, however, it is the discrimination against Swiss investment vehicles and the associated impact of the reform that is particularly open to criticism. It no longer has anything to do with preventing tax avoidance through the use of artificial structures involving co-investors, but rather appears to be a poorly conceived and inappropriate change of tax law.

Need for action

Real estate funds and companies but also industrial companies that are listed exclusively in Switzerland and which own real estate in Germany should carefully analyze their situation. The following points could be relevant, for example:
 

  • Implement all planned acquisitions by 1 July 2021 at the latest
  • Considering changes for structuring / set up of new investment vehicles
  • Analyze the expected changes in ownership of existing investments for the next 10 years
  • Introduce compliance mechanisms under consideration of anchor investor
  • List stock on an additional market within the EU or EFTA
  • When purchasing, more focus on amount of real estate transfer tax in that federal state
  • Dispose of investments based in Germany/transfer said investments to other investment vehicles listed in the EU or EFTA
  • Analyze consequences of transferring the investment vehicle abroad

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