Reform of the German Real Estate Transfer Tax (“RETT”)

Published on April 28, 2021

Following frequent announcements in recent weeks, particularly from the ranks of the grand coalition, on the temporarily suspended reform of the real estate transfer tax law, the German Bundestag passed the Act to Amend the Real Estate Transfer Tax Act on April 21, 2021 with the votes of the coalition parties. The adopted amendment is based on the Finance Committee's recommended resolution of April 14, 2021 and is to enter into force on July 01, 2021. The approval of the Bundesrat is still pending but is considered likely. It has not yet been announced when the Bundesrat will deliberate on whether to approve the amendment.

Background / RETT on Share Deals / RETT-blocker

The acquisition or transfer of a property in Germany generally triggers real estate transfer tax. However, if a property is owned by a company and its shares are transferred, this does not constitute a land acquisition in the true sense of the term. For this reason, the German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz - GrEStG) contains provisions, in particular in Sec. 1 (2a), (3) and (3a) GrEStG, according to which real estate transfer tax is also to be triggered in the event of certain changes or amalgamations of shareholdings in real estate-owning companies. As a rule, the magic threshold was 95% in relation to the relevant company shares. This 95% threshold made it possible, for example, to avoid real estate transfer tax by selling only 94% of the shares in a real estate company (share deal). So-called RETT-blocker models were also common, in which for instance one acquirer acquired 94% of a land-owning corporation and another one acquired 6% of the company shares.

These legal structuring approaches were and have been considered "reprehensible" and "unfair" by politicians for some time but are a consequence of the taxation system of real estate transfer tax law permitted by law. After an artistic pause of more than a year, the legislator has now returned to action.

The change in the shareholder structure of corporations as a new supplementary taxable transaction

The proposed legislation provides for the introduction of a new supplementary provision that is subject to real estate transfer tax and, comparable to the existing provision for partnerships (Sec. 1 (2a) GrEStG), is linked to a mere change in the shareholder structure of real estate corporations. Pursuant to the newly inserted Sec. 1 (2b) GrEStG, a taxable acquisition transaction shall also be deemed to exist if the shareholder structure of a real estate corporation changes within ten years in such a way that at least 90% of the shares are transferred to new shareholders. This acquisition does not therefore require a concentration of a specific percentage interest at the level of a specific acquirer or a group of acquirers to be considered collectively. In addition to direct changes, the new provisions also cover indirect changes in the shareholder structure and are to be applied with priority over the supplementary provisions of Sec. 1 (3) and (3a) GrEStG (amalgamation of shares, share transfer and economic interest).

The obligation to notify the relevant transactions and the resulting tax liability lie with the corporation owning the real estate

For reasons of protection of legitimate expectations, only those changes in shareholdings that have taken place or will take place prior to the entry into force of the provision on July 1, 2021 are to be disregarded under the adopted application regulation. A relevant period of consideration of ten years for the new taxable 90% change in shareholding pursuant to Sec. 1 (2b) GrEStG can thus begin on July 1, 2021 at the earliest.

The reducing of the 95% limit in the supplementary provisions to 90 %

The previous 95% threshold is also lowered to 90% for the previously existing supplementary provisions. These are the change in the shareholder structure of partnerships pursuant to Sec. 1 (2a) GrEStG, the direct and / or indirect amalgamation of shares or transfer of shares pursuant to Sec. 1 (3) GrEStG and the direct and / or indirect establishment or transfer of an "economic interest" in a real estate-owning company taxable pursuant to Sec. 1 (3a) GrEStG.

On the other hand, a lowering of the 95% threshold relevant for exemptions from taxation within the framework of the group clause in Section 6a GrEStG is not envisaged for a kind of fiscal’s benefit.

In this respect, too, the lowered thresholds are to apply from July 1, 2021. Insofar as a change in the shareholder structure of a real estate partnership, a share consolidation or a beneficial interest of at least 90% but less than 95% is established before this date, the previous threshold is to continue to apply in principle. With regard to the change in the shareholder structure of a real estate partnership, this applies until June 30, 2026, but for an unlimited period for the share consolidation and the economic interest. Therefore, a precise analysis and assessment of the actual circumstances and planned measures is required in each individual case in order to benefit from the transitional provision or to avoid inadvertently triggering real estate transfer tax in the future.

Extension of the period under review or relevant periods from five to ten or fifteen years, respectively

Along with the lowering of the threshold value, the previous period of consideration of 5 years will be increased to 10 years for the change in the shareholder structure of a real estate partnership (Sec. 1 (2a) GrEStG). This extended period is also to apply (only) from July 1, 2021. According to the transitional provision adopted, persons who were already existing shareholders under the old law on June 30, 2021, are not to become so-called new shareholders as a result of the extension of the period under consideration. Thus, if these existing shareholders acquire further shares in the partnership, this shall not lead to taxation pursuant to Sec. 1 (2a) GrEStG.

Stock exchange clause

In connection with the new taxable event, changes in the shareholder structure of corporations (Sec. 1 (2b) GrEStG), a new Sec. 1 (2c) GrEStG provides for the introduction of a stock exchange clause. It will also be of significance for acquisition transactions within the meaning of Sec. 1 (2a) GrEStG. In order to avoid consistently occurring acquisition transactions subject to real estate transfer tax due to ongoing stock exchange trading in stock corporations, it is intended to disregard such transfers of shares in stock corporations when determining the rate of the change of ownership within the meaning of Section 1 (2b) GrEStG or Section 1 (2a) GrEStG if the stock corporations are admitted to trading on the domestic or foreign stock exchanges named in the Act and insofar as the transfer of shares is made on the basis of a transaction on these stock exchanges. This disregard of share transfers is to apply both at the level of the listed company itself and at the level of the real estate-owning partnership or corporation held directly or indirectly by it. In other indirect transactions, however, the stock exchange clause will not apply, for example, if a fund holds an interest in the listed company and shares in the fund are traded.

Outlook / Recommendation

The legislative process has been and continues to be sharply criticised, not only in the real estate industry and in consulting circles, as being misguided in terms of steering policy. In order to close a supposed tax loophole in the real estate sector, practically all companies with even one production or administration property are exposed to an additional real estate transfer tax risk. With the argument of the desired equality of real estate investors with simple tax citizens, who usually have no possibility of avoiding real estate transfer tax when acquiring their own home through a share deal, a new source of tax is now being tapped. The fact that this is not necessarily beneficial to the creation of affordable housing is not recognized by the legislature as a viable argument against the reform. Instead, the moral club is against "tax savings" that were previously legally permissible but not acceptable. This club wields significant influence - the legislators have raised the real estate transfer tax from originally uniformly 3,5% to 5% and in some cases to 6,5%.  Others have argued for no or less estate transfer tax arguing that legislation has allowed some to avoid the tax whilst others were simply ignorant of the rules.

Taking into account the "new rules of the game", it will also be possible in the future to avoid incurring real estate transfer tax by careful structuring. Additionally, the transitional regulations offer approaches to preserve the application of the previous regulations, at least some cases.

In case of any questions, please do not hesitate to contact us. 

Jossip Hesse

Rechtsanwalt / Steuerberater I Partner

HANSA PARTNER Rommel & Meyer