After lengthy political discussions, on May 8, 2019, the German Federal Ministry of Finance released a draft act (Referentenentwurf) that includes new rules regarding real estate transfer tax (RETT) on share transactions in property owning companies. It is the next step following an agreement of German state finance ministers (Finanzministerkonferenz) on June 21, 2018, to avoid alleged tax circumventions used in big real estate portfolio transactions in the past.
The draft act is part of the annual tax changes act (Jahresteuergesetz) and shall in principle apply on share transactions from January 1, 2020. It also includes new rules regarding RETT relevant changes of share ownership in existing structures.
Here is a summary of the key rules included in the draft act and their application to current and future share transactions:
1. Extension of “change of ownership rule” to corporate property entities
Currently, changes of ownership in property holding partnerships and corporate entities are treated differently for RETT purposes. If, in a partnership, ownership of at least 95% of the partnership interest directly or indirectly changes within a period of five years (the “cooling period”), RETT will be triggered (the so-called “change of ownership rule”). Whereas, for corporate entities, a sale of the entire share capital in a company does not trigger RETT, provided each new shareholder owns less than 95% of the shares in the company. The current RETT rate is between 3.5% and 6.5% depending on the location of the underlying property.
The draft act now proposes that the application of the change of ownership rule will be extended to corporate entities, i.e., that a cooling period will also apply to share transfers in such companies. Therefore, if shares of 95% (or the respective lower future threshold – see below) or more in a property holding corporate entity (e.g., a German GmbH or a Luxembourg S.à r.l.) are transferred to new shareholders within the cooling period, RETT will be triggered, irrespective if such shares are transferred to one or several new shareholders.
The draft act does not include an exemption for share transfers in listed property companies or in property companies being part of listed industrial groups. Therefore, such groups owning German properties may struggle to analyze any future RETT implications of their share trades at stock exchanges, as according to German securities law, share trades need not be reported by investors if they do not trigger respective thresholds (e.g., share trades below 3% of the share capital). The lack of such an exemption has been criticized by several authors in the tax literature and industry representatives during the preparations of the draft act, but has not yet been addressed.