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Real Estate Transfer Tax in Share Deals: Implications of the Planned Amendments

On June 21, 2018, the finance ministers of the German states agreed to tighten the regulations regarding real estate transfer tax in share deals, and instructed the Federal Ministry of Finance (BMF) to prepare a corresponding draft bill. The measures are primarily intended to impede the so-called “RETT blocker structures”. However, the planned new regulation goes even farther:

1. Lowers the ownership interest from 95 to 90 percent
The threshold for ownership interests relevant for real estate transfer tax in case of a transfer of partnership interests and/or shares is lowered from 95 to 90 percent.

2. Creates a new regulation for corporations affecting transfer of shares

In the future, any direct or indirect transfer of at least 90 percent of the shares in a real estate holding corporation to new shareholders within a period of 10 years will trigger real estate transfer tax. A corresponding regulation already exists for partnerships. However, the privileges provided for partnerships, such as the transfer of real estate from a partnership to its partners and vice versa, will not apply to corporations.

3. Extends holding periods from five to 10 or 15 years
The five-year holding period during which not more than 94.9 percent (in the future 89.9 percent) of the partnership interests may be transferred to new partners without triggering RETT will be extended to 10 years. The extension of holding periods shall also apply to the privileges provided for transfers of real estate between a partnership and its partners. In case of a transfer of real estate from a partnership to a single partner, the holding period may even be extended to 15 years.

4. Imposes interest on real estate transfer tax receivables and late payment fines
In the future, real estate transfer tax receivables will be subject to interest of six percent per year. The interest period is to commence three months after the expiry of the two-week notice period for share deals, i.e., possibly even before receipt of the real estate transfer tax assessment. Furthermore, the ceiling of EUR 25.000 for late payment fines is expected to be abolished.

The creation of the new regulation for corporations may be the most critical measure for the industry.

As a result of the planned amendment, co-investors will no longer be able to acquire 100 percent of the shares in a real estate holding company without giving rise to real estate transfer tax. One of the previous shareholders would have to retain at least 10.1 percent of the shares for another 10 years; only then would it be possible to sell this share to another co-investor without triggering real estate transfer tax, provided, however, that at least 10.1 percent of the shares previously transferred have not been transferred directly or indirectly during the past 10 years.

As planned, the new regulation would apply to the transfer – rather than the sale – of shares. Therefore, it may trigger real estate transfer tax also for share purchase agreements already concluded prior to the implementation of the new regulation. This may be relevant if the transfer of the shares is subject to conditions that will only come into effect at a later point in time, for example in case of so-called “forward share deals”.

The new regulation, as currently proposed, will also be relevant for listed companies or companies with a more complex shareholder structure. In these cases, monitoring and tracking indirect transfers of shares will often be challenging and important, in particular since the real estate holding company, not the purchaser, will be liable to pay the tax.

Due to the extended holding periods for the privileges provided for partnerships, a minority interest planned to be acquired in the next years, e.g. because of the exercise of previously agreed call options, can give rise to the full real estate transfer tax, if the 10- or (if introduced) 15-year holding period has not yet expired at the time of the transfer. This should be taken into consideration when reviewing existing agreements with minority partners for possible call or put options, in order to amend the agreement if possible and necessary. Furthermore, depending on the percentage of the interest held by individual partners, any holding periods agreed upon with so-called "old" partners should be considered and extended if necessary in order to avoid exceeding the 90 percent threshold for the transfer of partnership interests to new partners within the tax relevant period.

The exact details of the amendments have yet to be defined and it is currently unclear from what point in time the provisions will apply and whether there will be transitional periods. Furthermore, it is unknown whether the BMF is going to prepare the draft bill and introduce it to the legislative procedure before the summer recess. However, taxpayers should be aware that the new rules may be applied already with effect of the date on which the draft bill becomes known. For more information on the implications of the planned amendments for existing structures and planned projects, please contact us.