On 21 June 2018 the Federal Ministry of Finance agreed on new real estate transfer tax (RETT) rules for share deals.
According to official press releases, a fundamental RETT reform that had been previously discussed was not agreed. Rather, the agreement consists of new RETT rules regarding:
- share deals with a lower threshold;
- longer holding periods; and
- aligning the rules that are applicable to corporations with those that already apply to partnerships.
No draft wording of the legislation implementing the new RETT rules is in circulation. Therefore, it is not yet known when these rules will apply for the first time and to what extent they may apply with retrospective effect.
The current RETT rules for share deals operate differently for partnerships and corporations:
- Rules for partnerships – as far as partnerships holding German real estate (eg, a German KG) are concerned, the direct or indirect transfer of at least 95% of their interests to new partners within a five-year holding period is subject to RETT.
- Rules for corporations – where German real estate is held by corporations (eg, a German GmbH or a Luxemburg Sarl), only the direct or indirect unification of at least 95% of the shares in the hand of an acquirer or a related group or the transfer of an already unified participation of at least 95% triggers RETT.
To specifically counteract RETT-blocker structures (so-called '94/6' structures), the legislature previously introduced a rule in 2013 pursuant to which the holding of an at least 95% economic participation is taxable for RETT purposes. This rule applies equally to partnerships and corporations.
The Federal Ministry of Finance's agreement on the new RETT rules for share deals can be summarised as follows:
- Lowering of thresholds – the threshold for triggering RETT will be lowered from 95% to 90%. This means that RETT can be avoided only if less than 90% of the shares or interests in corporations or partnerships are transferred. Consequently, sellers must keep more than 10% of the shares or interest in order to avoid RETT.
- Alignment of rules – the rules applicable to corporations will be aligned with the rules that currently apply to partnerships. Therefore, with respect to shares in corporations, not only their unification but also the transfer of at least 90% (due to the lowered threshold) of their shares to new shareholders will be subject to RETT. Consequently, it will no longer be possible to transfer 100% of the shares of a real estate holding corporation (eg, a German GmbH) to two unrelated investors without triggering RETT.
- Extension of holding periods – the holding period for sellers' minority stakes or interest of more than 10% will be extended from five to 10 years. As a result, shares or interests in corporations or partnerships may be fully acquired only after the extended period of 10 years has lapsed.
The new RETT rules for share deals may also provide for other consequential amendments to the RETT Act. Since no draft wording of the legislation currently exists, the effects on specific structures are difficult to predict at present.
The officially available information on the agreed new RETT rules for share deals is silent on when these rules will take effect. Conceivably, the rules could be introduced with retrospective effect. In a worst-case scenario, transactions entered into as of 21 June 2018 might trigger RETT pursuant to the new rules.
Arguably, such an extensive retrospective application might contradict constitutional principles. However, in recent years, the case law of the Federal Constitutional Court has been less stringent in declaring tax laws anti-constitutional due to their retrospective application. Against this backdrop, transactions which have not been signed and closed before 21 June 2018 should be thoroughly reviewed – particularly if high volumes of RETT are at stake.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
