New tax rules for real estate transfers in Germany are likely to lead to investors searching for alternative transaction structures to limit their tax costs.
After years of debate, the German government introduced new legislation on 1 July aimed at clamping down on tax avoidance by major investors when buying real estate in the form of shares. This practice has reportedly led to the loss of up to €1 bn in property transfer taxes for Germany’s federal coffers.
The reforms to the German Real Estate Transfer Tax (RETT), or Grunderwerbsteuer, are designed to make property acquisitions structured as share deals less attractive.
Here, Claudia Stremel, a partner at international law firm Greenberg Traurig in Germany, explains how the new legislation is expected to impact the market and investor behaviour.
PropertyEU: Can you explain how the German Real Estate Transfer Tax (RETT) was structured before and what has changed from 1 July?
Claudia Stremel: In Germany not only the acquisition of real estate but under certain circumstances also the transfer of shares or partnership interests in corporations or partnerships owning real estate in Germany (so-called share deals) triggers RETT.
Until 30 June that was basically the case in two scenarios: (i) irrespective of the legal form of the entity, RETT was triggered if the sale of a share or partnership interest led to at least 95% of that entity being owned by one partner or shareholder or a group of partners or shareholders, and (ii) in the case of partnerships, RETT was incurred if at least 95% of the interest in a partnership was transferred to one or more new partners within a 5-year period.
From 1 July, the relevant threshold has been lowered from 95% to 90% and the relevant period has been extended from 5 to 10 years. In addition, a new provision has been introduced for corporations: the transfer of at least 90% of shares in a property-owning corporation to new shareholders within a 10-year period now also triggers RETT on the entire value of the German property. This corresponds to the provision for partnerships. However, corporations cannot claim the same tax breaks applicable to partnerships. The new provision applies not only to real estate companies, but to all companies that own real estate in Germany.
PropertyEU: What are the main reasons for the amendment(s)?
Claudia Stremel: Certain politicians considered share deals to constitute tax evasion and an infringement of the public’s sense of justice since companies can avoid RETT but individuals can’t. The new regime was implemented to reduce the economic attractiveness of share deals and increase tax revenues.
PropertyEU: What will be the biggest impact on the market? Will we, for example, see fewer real estate transactions structured as share deals in future?
Claudia Stremel: The real estate market already anticipated the reduction of the threshold and adjusted the structures to the new thresholds. The new rule introduced for real estate owning corporations will have the biggest impact on the real estate market. Until 30 June, two buyers – one acquiring 94.9% and a minority shareholder acquiring 5.1% – could acquire all the shares without triggering RETT. From July, the majority shareholder must ensure that someone who qualifies as an ‘old’ shareholder when the majority share is transferred, remains a shareholder for at least 10 years with an equity share of more than 10%. Needless to say, this strengthens the negotiating position of a seller or other remaining shareholder.
In addition, not only direct shareholdings have to be considered for the calculation of the threshold, but also changes in the shareholding structure up to the level of the beneficial owner. In the case of international and multilevel structures, the tracing and administration will be a challenge.
We think that the new regime will reduce the number of share deals, but we do not expect them to disappear altogether. Furthermore, we expect the market to adapt to the new regime and find new structures to avoid RETT. Transfers of units in certain investment funds are not affected by the new regime; therefore, the new regime may result in a further increase of such funds.
PropertyEU: Which companies are set to be impacted most by the reforms?
Claudia Stremel: From our perspective, there is a high risk that operating companies and groups outside the real estate sector that own German real estate may unintentionally become subject to RETT as a result of direct or indirect changes in the shareholder structure or as result of an internal restructuring.
PropertyEU: Will the new legislation apply nation-wide or can individual states set their own rules?
Claudia Stremel: The RETT regime as such applies nation-wide; individual states can only determine the RETT rate. This currently ranges between 3.5% and 6.5% and there are rumours that rates may even be increased.
PropertyEU: Will international investors change their approach to doing business in Germany as a result of the changes?
Claudia Stremel: We expect this will have a major impact and we will see certain investors retreating from the German market because they are just not making the margins they require.