On 21 April 2021, the German Bundestag passed an important amendment to the Real Estate Transfer Tax Act. The amendment seeks to further restrict the tax-free transfer of shares for real estate companies. The bill largely corresponds to the draft as suggested by the German government back in September 2019, but takes into account criticism from experts (see Parliamentary Publication 19/13437). The German Bundesrat – the legislative body that represents the sixteen federal states – is likely to approve the draft so that the amendments will come into effect 1 July 2021.
Key changes:
1. The Participation Threshold Is Lowered from 95% to 90% and Key Deadlines Are Extended from Five to 10 Years
- The participation threshold for all supplementary real estate transfer tax provisions of Sec. 1 (2a), (3) and (3a) of the Real Estate Transfer Tax Act (RETTA) will be lowered from 95% to 90%. A further reduction to 75%, which was discussed earlier, did not get a majority.
- The holding period of Sec. 1 (2a) RETTA will be extended from five to 10 years. Furthermore, the retention periods stipulated in Sec. 5 (3) and Sec. 6 (3) Sentence 2 RETTA are extended from five to 10 years and the period stipulated in the newly adjusted Sec. 6 (4) No. 3 RETTA is extended to 15 years.
2. Change of Shareholders in Corporations (Sec. 1 (2b) RETTA – new)
Previously, Sec. 1 (2a) of RETTA stated that in the case of a partnership holding real estate, a transfer of shares within 10 years (previously five years) to new partners is subject to real estate transfer tax, applied only to partnerships. By the insertion of the new Section, Sec. 1 (2b) of RETTA, this is extended to corporations. Accordingly, a transfer of 90% or more of the shares in a real estate corporation within 10 years will also be subject to real estate transfer tax. The portfolio size of the individual shareholders (former requirement of unification thresholds in shares) is no longer relevant. However, multiple transfers of the same share will only be included once in the calculation of the 90% threshold. Moreover, only transfers to new shareholders count – share transfers between existing shareholders are irrelevant for the threshold. Under Sec. 1 (2b) of RETTA, indirect share transfers will also be taken into account, i.e. indirect changes in the shareholder structure may – pro rata – affect the percentages of the company's shares. The debtor of the real estate transfer tax is the company. The tax assessment is based on the value of the company's real estate.
3. Stock Exchange Clause (Sec. 1 (2c) RETTA – new)
Contrary to the original draft, the final version of the bill adopted a so-called stock exchange clause. According to this clause, transfers of shares in corporations via certain stock exchanges are not to be taken into account when calculating the thresholds outlined above.
4. Scope of Application
The amendments will enter into force 1 July 2021. The new provisions of Sec. 1 (2b) of RETTA apply to all share transfers that are realized after 30 June 2021. The law does not provide for a transitional arrangement for transfers based on contracts concluded prior to this date. Share transfers prior to 1 July 2021 are not covered by new Sec. 1 (2b) of RETTA and are also not to be taken into account in the threshold calculation. While this contains a risk that real estate transfer tax may be levied twice, in practice this may be avoided by means of an equitable arrangement. Yet, due to remaining uncertainty, such scenarios should be avoided when purchasing shares in companies before the amendment enters into force.
5. Conclusion
As a result of the Act, rules for the change in corporation’s shareholder structure will be parallel to the existing regulation for changes of partners in partnerships. However, the benefits of Sec. 5 and 6 of RETTA, which apply to transfers between companies and partners in the case of partnerships, will not apply to corporations.
The new regulations do not only affect typical real estate companies, but apply to all companies holding real estate in Germany.
Under Sec. 1 (2b) of RETTA, a complete transfer of shares in a corporation holding real estate triggers real estate transfer tax. The incurrence of the tax may only be avoided if a former shareholder retains shares of at least more than 10%. Indirect shareholder changes must also be observed carefully.
In the future, corporations will also have to record changes in their shareholder structure. This may be a challenge, particularly with regard to the relevant period of 10 years and indirect shareholdings.