Real estate tax law: what tax changes for share deals in Germany with the new RETT Act?

Germany further limits tax reducing structuring of share deals.

On 21 April 2021, the German parliament, Bundestag, adopted the reform on real estate transfer tax (“RETT”) regime about “share deals”. On 7 May 2021, the Bundesrat (Federal Council) gave its approval. Thus, the law is expected to come into force on July 1, 2021, provided to signature by the Federal President and subsequent publication in the Federal Law Gazette.

The reform deals with acquisitions or similar transactions, occurring after June 30, 2021, of real estate companies holding real estate assets located in Germany. It will also apply to foreign investors, who are not German residents and are controlling real estate companies holding real estates in Germany.

The goal of the reform is mainly to avoid the evident imbalance between taxation of direct real estate transactions and taxation of indirect real estate transactions through a real estate company.

The goal of that reform is well illustrated by the following comparison: on the one hand, the individual as buyer pays between 3.5% and 6.5% of transfer taxes out of his own pocket when acquiring a property directly, and on the other hand, the large institutional investors who structure their property acquisitions in an indirect manner through transfers of shares in property companies by which they can even avoid paying RETT.

To date, transferring less than 95% of shares of a real estate company to a new shareholder does not trigger RETT. Under Applicable law as it is strictly applied, non-trading companies (e.g. Gbr, KG) can, in a first step, transfer 94,9% of the shares and, then transfer 5,1%, of the shares after a 5-year period, without transfer taxes. Capital companies are under a different regime according to which the transfer trigger transfer taxes if 95% of the shares are in the same hand (or has a similar economical effect). As a consequence, the different treatment of shares in partnerships and stock companies allowed tax structuring within the legal limit of the 95% rule.

To make this kind of structuration less attractive, the threshold for share deals will be reduced from 95% to 90% so that the vendor or any third has to keep the other 10% for a delay of minimum 10 years (currently 5 years for partnership shares). Moreover, the tax treatment of real estate transactions from partnerships and stock companies will be harmonised. This will considerably reduce the number of operations which are not triggering any RETT.

Last, it has to be noted that the reform excludes listed companies from the applicable scope of the beforementioned amendments to the RETT Act.

Sabine Leuschner is a German-French lawyer and tax advisor and a partner in the real estate and tax departments of Sagasser Partners.