Reform of the real estate transfer tax and its impact on hotel transactions

Hotels are usually acquired not by transferring the relevant real estate (asset deal) but by way of the sale of the share capital in a special purpose vehicle, which owns the property (share deal). In Germany, this form of transaction has been specifically chosen to avoid real estate transfer tax (RETT), which is usually only payable on the acquisition of all land (or any part of land) and not on the transfer of shares in a company.

However, the tax department of the Federal and State Ministries of Finance has announced its intention to reform real estate transfer tax rules and their applicability to share deals in Germany, with the following amendments being subject to discussion:

The current legal position is that any change of partners in a real estate-owning partnership involving at least

95% of the shares in the partnership’s assets within a five-year period triggers a tax liability. According to the proposed changes, the relevant threshold of shareholding should be lowered to at least 90%, though the basis for assessing the real estate transfer tax remains the entire value of the property. Further, the current five-year period laid down in the provisions of the Real Estate Transfer Act (Grunderwerbsteuergesetz) will be extended to ten years and the provision now will now also apply to any change of the shareholders in real estate-owning companies.

If the changes are implemented, the impact on future share deals would be that a seller (or another minority shareholder) must retain a stake of more than 10% in the real estate vehicle for a period of at least ten years. Due to the extension of the tax liability for changes of partner/shareholder, this would apply both to companies and to partnerships.

The finer details of the amendments will not be known until the draft legislation has been tabled, though it is hoped that rather than testing the limits of constitutional law, lawmakers will try to avoid any new legislation having any retrospective effect to arrangements already in place. In any case, the implications for future hotel transactions are potentially significant.