Germany: Measures to tighten real estate transfer tax involving share deals

Bundestag (lower house of the German parliament) passed measures against so-called “share deals”

Bundestag passed measures against so-called “share deals”

The Bundestag (lower house of the German parliament) on 21 April 2021 passed measures against so-called “share deals.”

The need for reform is explained essentially by the fact that large investors can avoid real estate transfer tax on real estate transactions through share deals, whereas a private person would not usually have this option in the context of an “asset deal.”

An important aspect of the bill is:

  • Reducing the relevant investment level from 95% to 90%
  • Expanding the special provision for shareholder changes in partnerships owning real estate (RE-partnerships) to include corporations owning real estate (RE-corporations) but with introduction of a stock exchange exception clause
  • Extending the current holding periods from five to 10 or 15 years

Lowering the investment level from 95% to 90%

The Real Estate Transfer Tax Act (RETTA) contains several special provisions (so-called fictions) for share deals involving real estate.

These provisions equate a direct or indirect transfer of shares in a real estate company with the transfer of a piece of real estate. It is a key feature of these fictions that the investment level currently amounts to at least 95%. Hence, whenever at least 95% of the shares are unified in one single hand, or the shares already unified in one single hand (95% or more) are transferred to one acquirer at one time, there is a transaction that is subject to real estate transfer tax as far as real estate corporations are concerned.

Currently, real estate transfer tax can, therefore, be avoided in the event of a share deal involving the transfer of shares in a RE-corporation if the main investor holds directly less than 95% in the real estate company and the other shares are acquired by a co-investor.

According to the draft bill, the investment level would be reduced from 95% to 90% for all fictitious cases. Thus, in the future, a main investor would have to limit its direct holding in the RE-corporation to less than 90% for the acquisition not to be subject to real estate transfer tax.

Expanding the special provision for RE-partnerships to include RE-corporations

Under the proposal, in addition to generally lowering the investment limit to 90%, a corresponding special provision (based on a time-period) would also be introduced for RE-corporations. Thus, a RE-corporation would already incur real estate transfer tax when, for example, there are three new shareholders and each acquires 30% in the RE-corporation at the same time.

According to the explanatory memorandum, the proposed § 1 (2b) draft RETTA does not provide for a corresponding application of individual (personal) tax exemptions and the special exemption provisions for RE-partnerships.

Due to the fact that not only the associations of the real estate industry—but also the Bundesrat (upper house of the German parliament) in its comment on the original draft legislation—have proposed an exception provision for listed-stock corporations in this context; such a “stock exchange clause” for the special provisions relating to RE-partnerships and RE-corporations was now included in the draft legislation. Hence, in the context of the special provisions for RE-partnerships and RE-corporations, transfers of shares in listed-stock corporations would not be considered for the determination of the relevant participation quota. In the case of the already-existing provision of § 1 (2a) RETTA, this concerns participations of a listed-stock corporation in a RE-partnership. The RE-corporation itself would be liable for tax, by analogy with the application of the current legal system to RE-partnerships.

Finally, it must be assumed that real estate transfer tax arises upon the “closing” (assignment/transfer of the shares or the respective transfer of beneficial ownership). This represents a significant change as to date, in the case of forthcoming share deals in connection with RE-corporations, the “signing” (conclusion of the share purchase agreement) has been the key criterion.

Extension of periods from five to 10 / 15 years

The special provision currently in place for RE-partnerships includes a five-year period. In addition, there are special exemption provisions for RE-partnerships. Under certain circumstances, these allow exemptions for real estate transfers between a RE-partnership and its shareholder. The exemptions require five-year pre- and post-holding periods.

Under the proposal, all periods in the RETTA generally would be extended to 10 years. Moreover, with respect to the pre-holding period, the draft bill provides for an extension to 15 years. The purpose of this provision is to counteract abuse and to make tax arrangements designed to achieve tax benefits by gradually acquiring shares in the assets of a RE-partnership significantly more difficult.

Temporal application

The bill includes provisions regarding the temporal application of the amended RETTA. In general, the amended RETTA would be applicable for the first time to acquisition transactions realized after 30 June 2021. However, the reduction of the investment limits and the extension of the periods basically have implications for past legal transactions.

What’s next?

Tax professionals have observed that after almost two years in the legislative process, the reform of real estate transfer tax has now entered the home stretch. Following action by the Bundestag, the Bundesrat must still approve the legislation.

Read a May 2021 report [PDF 375 KB] prepared by the KPMG member firm in Germany



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