On 8 May 2019, the German government drafted the 2019 Annual Tax Act bill, which includes amendments to the real estate transfer tax (RETT) for share deals. Announced at the Conference of the German State Finance Ministers, this RETT will affect transactions that indirectly or directly involve shares in companies whose assets include German real estate.
The government is expected to submit this bill to the Bundesrat shortly for debate and eventual passage. The following are its most important features vis-a-vis real estate transactions:
- The threshold is reduced from 95% to 90%: The new 90% threshold applies to RETT-liable "consolidation of shares" in partnerships or companies, including indirect consolidation.
- New shareholders in partnerships and companies are to be taxed: The rules for taxing new partners or shareholders in partnerships and companies will be tightened. Transfers (including indirect transfers) to new partners of at least 90% of partnership assets that include real estate will be subject to a real estate transfer tax, and a 10-year monitoring period will apply. A corresponding taxable event will be introduced for the transfer of company shares to new shareholders and the company itself will be the tax debtor.
- The tax-privileged acquisition of a minority interest in a company from an "existing partner" is only possible after 15 years: The acquisition of a minority interest in a partnership from an existing partner is only eligible for tax privileges after a holding period of 15 years from the date of the buyer's initial acquisition of majority interest in the partnership. Also, the current holding periods are extended from five to ten years, which are a legal requirement for application of tax exemptions pursuant to sections 5 and 6 of the German Real Estate Transfer Tax Act.
The draft bill contains wide-ranging transitional regulations, which have significant practical implications. These regulations are highly complex and must be carefully considered in each case. Specifically, the following provisions are being planned:
- The above-mentioned new regulations will generally apply to acquisitions made after 31 December 2019. In individual cases, application of the new regulations can be deferred to a later point in time.
- For non-taxable consolidations of shares or changes of shareholders (or partners) amounting to between 90 and 94.9%, the transitional regulations aim to ensure that an additional acquisition reaching the former threshold of 95% will still be taxable in future, irrespective of the threshold reduction to 90%. As a rule, an "additional acquisition" of this type will still be taxable if the share ownership threshold has reached 90% by 31 December 2019.
- The ten-or-15-year holding-period extensions in the draft bill, which are required for tax exemptions pursuant to sections 5 and 6 of the German Real Estate Transfer Tax Act, will not apply if the current period of five years has already expired by 1 January 2020.
The main content of the draft bill has already been publicised through press releases and other sources. Despite justified criticism from the real estate industry, the German government is expected to stay the course and submit the bill to the Bundesrat.
Under this bill, a RETT-privileged share deal will require the existing partner to retain a minority shareholding of more than 10% for more than ten years, irrespective of the legal form of the property company.
If the draft bill's transitional regulations for taxing an additional acquisition breaching the former threshold of 95% are implemented without further changes, additional effort will be necessary to monitor and review these potential RETT-liable events. In our opinion, it would be more reasonable to limit the application of these regulations to a more manageable transitional period.
The other transitional regulations can be viewed positively since they carry a low risk of an adverse retroactive effect. However, minority-shareholding acquisitions (usually based on option rights) planned for after 31 December 2019 remain problematic. The transitional regulations will have to be considered in each individual case.
Businesses anticipating share deals or the exercise of option rights in coming years should monitor the legislative process and carefully consider the amendments in this bill before completing a transaction. For more information on this bill and how it could affect your business, contact the following local CMS expert.