Current status of real estate transfer tax reform for share deals

Real estate transactions where no real estate transfer tax (RETT) is incurred have been a topic in the public media for quite some time. On 21 May 2016, the German news magazine Der Spiegel published an article under the title of "Highrise tax-free on sale". The RETT-free sale of the Sony Center in Berlin was also the subject of critical reporting. Public opinion objects to the fact that RETT can be avoided by using share deals, which are referred to as "sophisticated company structures", "savvy tax avoidance schemes" or "tax loopholes".

In particular this perception in the media can probably be seen as the reason why a working group by several German federal states (Länder) has been established to submit suggestions for a reform of the real estate transfer tax law in respect of share deals. The final report of this working group is expected in spring 2018.

Upon objective analysis of the legal situation, allegations by the media and partly by politicians that in the case of RETT-free share deals "tax loopholes" are used deliberately, prove to be unfounded. It is true that upon the transfer of shares in property holding companies, from the perspective of real estate transfer tax law the sale is only deemed a real estate acquisition if

  • 95 percent of the shares in the assets of a property holding partnership are transferred to new shareholders within a period of five years (Section 1 (2a) of the German Real Estate Transfer Tax Act [Grunderwerbsteuergesetz, GrEStG]), or
  • 95 percent of the shares of a property holding partnership or corporation are unified in one hand (Section 1 (3) of the German RETT Act), or
  • 95 percent of the beneficial interest in the company assets or in the company are transferred to a new acquirer (Section 1 (3a) of the German RETT Act).

The point is that the above-mentioned provisions with their 95 percent threshold are already intended to prevent misuse. This means that from a legal perspective, the transfer of less than 95 percent of the shares is not considered as abusive tax structuring. In these cases in particular, the legislator does not proceed from the assumption of tax evasion.

The 95 percent threshold, which seems high at first glance, is also justified by the facts. Other than in the case of an asset deal, from a civil law perspective the property itself is not transferred with a share deal. The company as an own legal entity remains the owner of the property. Besides, there may also be other economic reasons to use a share deal. Whereas with an asset deal only certain agreements are automatically transferred to the acquirer, in principle all agreements concluded by the target company remain effective with a share deal. Apart from this, there are many companies, which do not operate in the real estate industry, that own valuable real estate. This real estate, however, is not always the reason for the transfer of shares in these companies, for instance if the company includes a strategic investor. In summary, it can be said that acquiring real property by way of a share deal does not mean using a "tax loophole", but an opportunity given by the legislator. The legislator has taken a deliberate decision not to assume a transfer of real property if less than 95 percent of the shares in a company are transferred.

In terms of legal policy, changing the current regulations for share deals is within the discretion of the legislator. It is not known yet, how the suggestions of the working group will look like precisely. However, it is likely that either the 95 percent threshold will be lowered or the relevant five-year period will be extended. In particular, lowering the 95 percent threshold is not as easy to implement as it might seem:

If the 95 percent threshold is lowered, the relevant connection to the real property could no longer be given and the real estate transfer tax would take the character of a capital transfer tax. For capital transfer tax, however, the administrative and tax sovereignty lies with the federal authorities and not with the Länder (Article 106 (1) No. 4 of the German Constitutional Law; Grundgesetz; GG). Besides, the introduction of a capital transfer tax by a single member state is not permissible according to the EU Directive 2008/7/EG.

Furthermore, lowering the 95 percent threshold would raise the question whether the factual ground of justification – the fictitious transfer of real property – is still met.

If RETT continues to be levied on 100 percent of the real property value even after the 95 percent threshold has been lowered, this would also raise the question if this represents excess taxation.

In conclusion, it can be said that it would be desirable if the legislator tackled the issue of the RETT reform for share deals with sound judgement, so as not to make this economically eminently important form of transaction unnecessarily difficult.

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Jan Evers
Partner, Lawyer, Specialised Tax Lawyer
P +49 30 89 04 82-163