Under the current German real estate transfer tax (RETT) rules, RETT is triggered if 95% or more of the shares/interest in a real estate-owning corporation or partnership are directly or indirectly acquired or consolidated in any form in the hands of one legal entity or person or more entities or persons that are under common control.
Further, RETT is triggered if a person, entity or group of related parties acquires 95% or more of an “economic shareholding” that consists of a direct or indirect holding of an interest or shares representing at least 95% of the total interest or shares in the corporation.
Special rules apply to partnerships where RETT is triggered if, within a period of five years, at least 95% of the interest in the partnership is transferred to new partners (the Partnership Rules). All transfers of interest within said five-year period will be accumulated and it is irrelevant whether any of the new partners holds a majority interest in the partnership, but the mere transfer of 95% or more of the partnership interest triggers RETT. Further, the indirect transfer of partnership interests, e.g., the transfer of shares in a corporation that is a partner in a partnership also could count for the 95% threshold.
If an existing partner in a real estate-owning partnership holding, for e.g., 94.9% of the interest in the partnership acquires the remaining 5.1% of the partnership interest after the lapse of five years (the Existing Partner), RETT is only triggered on the 5.1% interest (the Existing Partner Rules).
An entity or partnership is also considered to hold real estate if it itself does not own any German real estate, but is directly or indirectly invested into a real estate-owning partnership or company.
Proposed New Rules
On 8 May 2019, the German ministry of finance published a draft law to amend the current rules for share deals (the RETT Proposal) that basically follows the proposal made on 21 June 2018 by the conference of the ministers of finance of the German Federal States (Finanzministerkonferenz).
Pursuant to the RETT Proposal, the current threshold of 95% would be decreased to 90%, which means that RETT is triggered if only 90% of the shares/interest in a real estate-holding entity are transferred or consolidated in the hands of one legal entity or person.
Similarly, to trigger RETT under the Partnership Rules, it will be sufficient to transfer 90% of the partnership interest. More importantly, the time period during which transfers are accumulated would be extended from the current five-year period to a 10-year period.
The most significant change to the German RETT rules would be the proposal to apply the Partnership Rules to corporations. This means that the mere transfer of 90% of the shares in a real estate holding company to new shareholders within a period of 10 years will trigger RETT even if none of the shareholders holds a majority stake in the corporation, or if the transfer is made to several unconnected new shareholders. It needs to be noted that an indirect transfer of shares could also trigger RETT if certain conditions are met and that the new rules also apply to listed companies.
Finally, the Existing Partner Rules should only apply if the Existing Partner was a partner in the real estate holding partnership for a period of at least 15 years. Any acquisition of the remaining partnership interests before the lapse of this 15 years would be fully subject to RETT.
Pursuant to the RETT Proposal, the new rules should apply to all transactions realized after 31 December 2019. Based on the language of the draft law, the closing date, and not the signing date, will be the deciding factor.
If the new rules are implemented as proposed by the ministers of finance, share deals may become less attractive than they are today. Since the closing date will decide whether or not the new rules for share deals apply, any transaction that intends to benefit from the current rules should be closed before 31 December 2019 unless the deal is signed before the draft law is introduced to the lower house of parliament (Bundestag).
If the new rules are implemented as proposed, the application of the Partnership Rules to corporations will require that the seller (current shareholder) stays in the structure for an additional 10 years with a shareholding of at least 10.1%. Further, as any indirect transfers to this 10.1% shareholder would also trigger RETT, indirect transfers to this shareholder need to be monitored for a period of 10 years to avoid any unexpected RETT even years after the acquisition of the shares. It needs to be noted that even after the lapse of the 10-year (or longer) holding period, RETT would be triggered in full if the majority shareholders consolidate 90% or more of the shares in the real estate-holding company as the Existing Partner Rules would not apply to the corporation.