Real Estate Transfer Tax and Share Deals – The story continues

The current discussion draft of the Real Estate Transfer Tax ("RETT") Amendment Act wants to tackle RETT-optimised share transactions even further.

According to a current discussion draft of the Federal Ministry of Finance on the RETT Amendment Act (GrEStNG draft), the taxation of share transactions (so-called share deals) for the purposes of RETT is to be tightened again. The legislator had already taken extensive action for this purpose about two years ago.

The discussion draft results in far-reaching changes for real estate companies including real estate funds.

New concept for avoiding share deals optimised for RETT purposes

The GrEStNG draft abolishes the previous taxable events of the legal or economic consolidation of shares as well as the taxation of changes of shareholders, which was significantly expanded only about two years ago, in favour of a uniform taxable event, namely the consolidation of all shares. In principle, the taxable event presupposes that all shares in a company with domestic real estate (e.g. through the purchase of shares) are (un)indirectly combined.

Furthermore, the previous rigid percentage participation limits (as a rule < 90 percent of the shares of the real estate owning company) and the instrument of change of ownership taxation are replaced by two new concepts in the GrEStNG draft in order to avoid arrangements, namely the concept of the "group of buyers" and the holding of shares "in the serving interest".

According to the GrEStNG draft, a group of buyers is deemed to exist if at least two legal entities jointly acquire all shares in a real estate company directly or indirectly on the basis of coordinated legal transactions (or coordinated transfers of ownership) of the relevant shares. A legal entity whose acquisition had already contributed to the realisation of a taxable combination of all shares in the past shall not be a member of the group of buyers if the legal entity in question already held a direct or indirect interest in the real estate company prior to the coordinated legal transactions (or the coordinated transfers of ownership) and if its interest is not increased by the coordinated transaction. The GrEStNG draft contains further provisions on the question under which circumstances a coordinated conduct shall exist, whereby a coordination between all buyers is not required for this according to the wording of the GrEStNG draft. If there is a temporal or factual connection between the relevant transactions, for example, there should regularly be a coordination.

The planned regulation recognisably takes up the legal idea of the previous taxation of changes in shareholders. A jointly planned transaction relating to all shares of the company thus remains subject to RETT, even if not all shares are held by one legal entity.

No consideration of shares held in the serving interest

This is supplemented by the concept of holding shares in the serving interest of the buyer or group of buyers. Shares held in the serving interest are to be disregarded when considering whether there is a consolidation of all shares. They shall be treated as own shares of the real estate company.

The GrEStNG draft contains a whole series of examples of the circumstances under which a serving interest should regularly exist. The question under which circumstances the individual presumption can be rebutted (counter-evidence) is not regulated by law. For example, a serving interest of a legal entity (regularly a (possibly also indirect) minority shareholder of the real estate company) should regularly exist in the following cases:

• The fair market value of the minority interest is less than the RETT that would result for the buyer (or the group of buyers) without taking these shares into account.
• The shareholder rights of the minority shareholder are restricted.
• The minority shareholder receives a fixed remuneration for his shareholder position, which not all shareholders receive.
• The minority shareholder does not convey a percentage interest in the real estate company to the shareholder and the buyer or the group of buyers can exercise a co-determining influence on the minority shareholder. In this way, the legislator intends to cover, in particular, foundation structures used as so-called RETT blockers.

Extension of the RETT to fund unit transactions

Special funds within the meaning of Section 1 (10) of the German Investment Code (Kapitalanlagegesetzbuch) or a comparable investment fund in contractual form under foreign law as well as each part of an investment fund (sub-fund) that is separate from each other in terms of liability and asset law are treated in the GrEStNG draft in the same way as real estate companies (in the case of direct holding of domestic real estate) or so-called "intermediary companies" (in the case of indirect holding of domestic real estate). The purchase or transfer of fund shares (so-called unit deals) could thus lead to the accrual of RETT in the future under the same conditions that are provided for company shares in the GrEStNG draft.

The holding of domestic real estate in trust by a capital management company for an investment fund has so far allowed the transfer of the shares in such an investment fund (with the continuation of the management by the capital management company) in a completely RETT-neutral manner. This possibility would no longer exist under the GrEStNG draft. This mainly affects special fund structures, whereas in the case of mutual funds, the transfer of fund units would probably still not be subject to RETT as a rule due to the large number of unrelated investors.

Furthermore, by putting investment funds on an equal footing with companies, the GrEStNG draft significantly expands the scope of application of RETT law. Accordingly, the entire complexity of the provisions directed against property transfer tax-optimised structures would in future also have to be taken into account in all transactions involving fund shares with (direct or indirect) domestic real estate reference.

Further notes on share transactions

Even under the GrEStNG draft, the taxation event is already triggered by the obligation transaction. The subsequent transfer of shares is only relevant if the underlying transaction is not already subject to RETT.

In the case of share transactions subject to RETT, the purchaser of the shares or the group of purchasers is also subject to corresponding tax declaration obligations. These are to be fulfilled electronically within one month.

A personal liability of the real estate company and a liability in rem of the real estate is introduced. The real estate company is designated as the liable debtor if the duty of notification has not been fulfilled or has not been fulfilled in time or in full. The RETT is then to rest on the property as a public charge, so that enforcement of the taxation claim could be carried out on the property.

Tax exemptions as a result of the MoPeG

Furthermore, adjustments are made to the tax exemptions for communities of joint owners in light of the Act to Modernise the Law on Partnerships (MoPeG), which will come into force on 1 January 2024.

Against the backdrop of the extensive abolition of the legal concept of joint ownership as of 1 January 2024, the tax exemptions for real estate transfers between the shareholder and "his" company are newly regulated, without reference to joint ownerships in the wording of the law. The tax exemption requires, among other things, a 5-year pre- or post-retention period of the participation in question. The wording of the discussion draft is unclear as to whether and to what extent these tax exemptions distinguish between partnerships and corporations. Consequently, it would be logical to have a form that is neutral in terms of legal form. The further legislative process remains to be seen in this respect.

Adjustment of the group clause in the case of restructurings

The current RETT exemption for restructuring measures in groups is to be extended by the GrEStNG draft to all types of facts subject to RETT, i.e. in particular including real estate sales within the group. The intention is probably a far-reaching tax exemption for transactions between group companies, including the group parent company, if the group parent company holds the shares in the relevant companies in full (possibly also indirectly). An essential prerequisite for the tax exemption is that the determining influence of the legal entity over the property does not change as a result of the transaction. In our opinion, the draft still requires linguistic clarification; in particular, the wording of the draft contains restrictions on the tax exemption whose scope appears unclear.

Reduced RETT for owner-occupied real estate

The GrEStNG draft grants the federal states the possibility to introduce a tax exemption or tax relief for the acquisition of owner-occupied real estate. The exact form is left to the legislation of the individual federal state.

Implementation of the RETT reform could take place quickly

About two years after the last major reform to prevent share deals optimised for RETT purposes, the legislator now seems to want to follow up. In this context, the previously rigid shareholding limits will be replaced by abstract legal concepts. In the event of implementation of the GrEStNG draft, legal disputes between tax authorities and taxpayers on the interpretation of these terms in individual cases can be expected in large numbers. The interpretation is also likely to lead to more legal uncertainty in the structuring of corresponding transactions than the percentage shareholding limits. The same applies to the intended inclusion of fund shares.

The GrEStNG draft was sent to the associations for comment. We are therefore at a very early stage of the procedure. In our opinion, however, the legislative process can be expected to continue quickly. The corresponding new regulations could already come into force at the beginning of next year and henceforth apply to real estate transactions that are realised after the beginning of the year. Insofar as domestic real estate is (indirectly) involved in intended transactions, the players should therefore include the GrEStNG draft in their considerations. This applies in particular to transactions involving foundations or fund units.

The further legislative process should also be observed with regard to the tax exemptions for transactions within a group and for real estate transactions between company and shareholder. In this respect, there is also a need for "technical" improvements to the wording of the discussion draft. Furthermore, it is to be hoped that the wording will be neutral in terms of legal form. In principle, it is positive that the legislator has apparently recognised the need for action arising from the MoPeG after 1 January 2024 for the tax exemptions under sections 5 and 6 RETT Act and that corresponding considerations have found their way into the draft.