The BVA recently confirmed far-reaching reporting obligations to the Transparency Register for foreign legal entities with real estate ownership in Germany
In its most recent FAQ dated 5 May 2023, the BVA commented on a new reporting obligation for foreign companies as well as legal forms such as foundations and trusts (i.e. “legal entities”), directly or indirectly owning real estate in Germany, for so-called “existing cases”. In the opinion of the responsible supervisory authority of the German register on beneficial ownership (i.e. the “Transparency Register”), each foreign legal entity, which due to a past legal transaction directly or indirectly holds at least 90% of the shares of a company owning real estate in Germany, must report its beneficial owners to the Transparency Register. The reporting obligation is void only if the foreign legal entity is already registered in a Transparency Register of another EU state.
Foreign legal entities must therefore transmit their beneficial owners to the Transparency Register at the latest by 30 June 2023 if:
- they have become owners of real estate located in Germany since before 1 January 2020; or
- they have acquired shares within the meaning of Sec. 1 (3) GrEStG (German Real Estate Transfer Tax Act) (at least 90% of the shares) or within the meaning of Sec. 1 (3a) GrEStG before 1 August 2021.
Real estate tax aspects, which have to be considered when reporting to the Transparency Register, are added. Facts subject to notification obligations could in particular be a previously unidentified tax issue, which would also require the checking of intended notifications to the Transparency Register beforehand for tax-related need for action.
Real estate in the focus of money laundering regulation
In recent years, the German legislator has tried to increase AML regulation of the real estate sector, which is regarded as being particularly susceptible to money laundering. The regulation especially aims at disclosing the ownership structure of real estate with the aid of the Transparency Register. As such, as per 1 January 2020 all foreign legal entities acquiring real estate directly by means of an Asset Deal were obliged to notify their beneficial owners to the German Transparency Register. As of 1 August 2021, this reporting obligation also applies if real estate in Germany has been acquired by means of a Share Deal within the meaning of Sec. 1 (3) GrEStG or Sec. 1 (3a) GrEStG.
Since then the reporting obligation is triggered in case of:
- an acquisition by means of a Share Deal within the meaning of Sec. 1 (3) GrEStG, which means at least 90% of the shares of a company with German real estate consolidate at the foreign legal entity or are transferred to it;
- a legal transaction within the meaning of Sec. 1 (3a) GrEStG, which means the legal transaction leads to the foreign legal entity having beneficial ownership of at least 90% of a company owning German real estate.
To enforce the reporting obligation, a prohibition of notarial certification in such transactions has been introduced if and as long as the foreign legal entity does not meet its reporting obligation (Sec. 10 (9) sentence 4 GwG (German Money Laundering Act).
Extension of reporting obligation with the Sanctions Enforcement Act II
With the coming into force of the Sanctions Enforcement Act II on 28 December 2022, the reporting obligations for foreign legal entities holding real estate in Germany has been extended. With the aim to also cover "existing cases", not only foreign entities that newly acquire real estate (i.e. after 1 January 2020) in Germany directly by means of an Asset Deal or (after 1 August 2021) indirectly by means of a Share Deal will become obliged to report, but now also if they already directly or indirectly own German real estate before these points in time.
The new regulation to register existing cases now also obliges foreign legal entities to report their beneficial owners to the Transparency Register if:
- they have become owners of real estate located in Germany before 1 January 2020; or
- they have acquired shares within the meaning of Sec. 1 (3) GrEStG (at least 90% of the shares) or within the meaning of Sec. 1 (3a) GrEStG before 1 August 2021.
The reporting obligation is void only if the foreign legal entity is already registered in a Transparency Register of another EU member state. The reporting of beneficial owners to a Transparency Register of a non-EU member state (i.e. an EEA state), however, is not sufficient.
For the new reporting obligation to register existing cases there is a transition period until 30 June 2023.
There were, however, uncertainties as to the scope of application of the new regulation. According to the wording of the statute, the reporting obligation to the Transparency Register applies to all foreign legal entities holding directly or indirectly at least 90 % of shares of a company with ownership of German real estate. This inter alia would lead to numerous foreign companies (i.e. within a chain of subordinate companies) of the same group having to ultimately transmit all their beneficial owners to the Transparency Register, even when merely a (subordinate) group company owns real estate in Germany. In terms of money laundering prevention, this result could be questioned because the transparency of the ownership structure of real estate had already been established with the Transparency Register obligation of the company directly owning the real restate.
New FAQ of the BVA confirm wide scope of application for foreign entities
However, in its new FAQ dated 5 May 2023 the BVA confirms the wide scope of application of the reporting obligation of foreign legal entities.
The authority clarifies that a legal entity with its seat abroad, which already before the addition of the reference to the GrEStG in Sec. 20 (1) sentence 2 GwG (as per 1 August 2021) directly or indirectly holds at least 90% of the shares of a German company owning domestic real estate, is obliged to report and subsequently must notify its beneficial owners to the Transparency Register.
Consequently, in case of existing real estate all foreign legal entities in the participation chain are obliged to report insofar as they meet the respective requirements of Sec. 1 (3) or (3a) GrEStG and reach the threshold of at least 90% of shares, as long as they are not already registered in another EU-Transparency Register.
However, for the determination of the significant shares the principles of the GrEStG deviating from the GwG apply and therefor the relevant 90% threshold is to be calculated by multiplication or a calculation through shares.
Real estate transfer tax-aspects are to be considered
Insofar as the extended reporting obligations to the Transparency Register for foreign legal entities refer to the GrEStG, these are real estate transfer tax issues, which have to be reported separately to the responsible tax offices if a real estate transfer tax related matter is realised. There are tax reporting deadlines of two weeks or of one month starting from the knowledge of the matter to be reported. These notifications are equivalent to tax returns, so that their late submission can be sanctioned by surcharges and, under certain circumstances, also within the framework of criminal and fine proceedings.
Furthermore, since the coming into force of the Jahressteuergesetzes 2022 (German Annual Tax Act 2022) there is the matter of a double taxation of the same transaction (in each case separate taxation of the obligation and the fulfilment transaction underlying the transfer of shares) when the respective reports have not been handed in fully and on time.
Affected foreign legal entities should also observe that these real estate transfer tax notification obligations cannot only be triggered by acquisitions in the classical sense. Rather, in particular intragroup measures (i.e. by establishing holding companies) such tax obligations may be triggered.
Money laundering and tax law-related action required for foreign entities
At least the confirmation of the wide-range scope of application of Transparency Register obligations by the responsible supervisory authority BVA leads to that foreign legal entities holding real estate in Germany or (if applicable also indirectly holding) shares in a company owning real restate in Germany of at least 90 % shares should check their reporting obligations. In case of a late reporting to the Transparency Register, high fines of up to EUR 150,000 are imminent, which may also be enforced abroad under certain circumstances, as well as the public notice of the fine (i.e. “naming and shaming”).
While there appears to be little tangible benefit in the extended reporting obligations for foreign legal entities from a money laundering prevention viewpoint, it can most certainly be expected that the German tax authorities will recognise and use for themselves the additional notifications as further means of control.
Insofar as reports must now be made within the scope of the extended reporting obligations to the Transparency Register, it is strongly recommended to the affected legal entities with regard to the content of the report to the Transparency Register to verify:
- if real estate tax reporting obligations have been observed in the past in this regard or if respective reports within the scope of tax declaration obligations need to be made up for; and
- if actual real estate transfer tax charges are to be expected or if applicable tax exemption could apply.