I. Current legal status and intention of the legislator

The background for the intended reform of the Real Estate Transfer Tax Act [Grunderwerbsteuergesetz – GrEStG] is, in particular, that it is possible to fully avoid the otherwise incurring real estate transfer tax by using certain contractual arrangements within so-called share deals.

1. Current taxation of share deals (corporation)

Subject of the so-called share deals with respect to corporations is not the real estate property itself, but the shares in the corporation that (at least inter alia) holds real estate property. The special tax feature of such share deals – in simplified terms – is that under the GrEStG, a transaction only triggers real estate transfer tax when at least 95 % of the shares in the company are transferred directly or indirectly to a new shareholder or “is merged” in the person of a shareholder of the real estate company.
If the sale of the company is now structured in such a way that only 94.9 % of the shares in the company are transferred to a new shareholder or the shares in the company are transferred to two independent (new) shareholders at a ratio of 94.9 % and 5.1 %, no real estate transfer tax will incur under the current version of the GrEStG.

2. Retention periods for partnerships

In addition, pursuant to the current GrEStG the triggering of the real estate transfer tax with respect to a change of 95 % of the participation in a partnership (e.g., GbR (private company), OHG (general partnership), KG (limited partnership), GmbH & Co. KG (German limited commercial partnership (KG) consisting of a general partner (GmbH) and a limited partner)) depends on a five-year period. Hence, after a period of five years, a real estate tax free transfer of more than 95 % of the participation in a partnership which holds at least a piece of a real estate property is permissible.
Thus, it is possible in compliance with the current legal situation to acquire all participations in a partnership which holds real estate property under extensive avoidance of real property transfer tax by structuring a so called extended acquisition (gestreckter Erwerb): Therefor, first, 94.9 % of the participation in the partnership have to be acquired and after the five-year period has expired, the remaining 5.1 % of the participation can be acquired. In this case, the acquisition of the additional 5.1 % would in principle trigger the real estate transfer tax for the entire acquisition (in the amount of 100 %), but the acquisition is exempted from the real estate transfer tax to the extent that the acquirer already holds an participation in the partnership (in this case 94.9 %).

II. Planned innovations (working group)

1. Reduction of the participation limit from 95 % to 90 %

The threshold which triggers the real estate transfer tax within share deals shall be lowered from 95 % to 90 %. It should be noted that even a reduction to 50 % or 75 % was discussed. This means that an external investor shall participate with 10.1 % of the shares instead of the previous 5.1 %.

2. Incurring of the real estate transfer tax in the event of a change in the shareholder structure in the amount of 90 % (section 1 para. 2b GrEStG draft)

For the practice the most far-reaching renewal is that an (additional) supplementary provision shall be implemented according to which the real estate transfer tax shall be triggered if a total of 90 % of the shareholders of a corporation changes within 10 years. Pursuant to this (intended) provision, the incurring of the real estate tax does not depend on the fact that the participation or amount of shares held by one shareholder exceeds a certain threshold.
This is intended to prevent the (in practice widespread) constructions in which a co-investor is “brought along” who only holds a “dwarf share“. According to the current legal situation, no real estate transfer tax is triggered in this case due to a lack of acquisition/association of 95 % of the shares in the hands of one shareholder.

3. Extension of the retention period

All current “five-year periods” shall be extended to ten years. This would make the aforementioned models of an extended acquisition less attractive. At present, five-year periods exist with respect to the aggregation of shareholder changes in partnerships, to the retention period pursuant to sections 5 and 6 GrEStG and for the retention period pursuant to section 6 para. 3 GrEStG.
Thus, cases in which the acquired real estate property is transferred to a partnership or the real estate property in a proportionately acquired partnership will be transferred to one partner will also be affected in the future. In these situations, the property would initially have to be held by the acquiring shareholder for 10 years or the acquirer’s participation in the partnership has to remain unchanged respectively before it could be transferred to the partnership or removed from the partnership without any real estate transfer tax incurring.

4. Expected entry into force

In legal terms the new provisions could take effect retroactively from the date of the adoption in the Federal Cabinet [Bundeskabinett] (start of the legislative procedure). At present, the legislative procedure has not yet begun in such way so that, in our opinion, acting in compliance with the current legal situation is possible. With respect to the previous jurisprudence of the Federal Constitutional Court [Bundesverfassungsgericht] pertaining to the protection of legitimate expectation [Vertrauensschutz] it seems rather unlikely that structures which are carried out between the official disclosure of the reform proposal at the end of June 2018 and the introduction of the legislative proposal to the Federal Parliament will be captured retroactively although this seems to be conceivable with respect to the will of the legislator.

III. Consequences for the practice

With respect to the planned expansion of the real estate transfer tax offences and the lowering of the tax triggering thresholds, the (real estate transfer tax) implications in the context of transactions and restructurings will come to the fore even more strongly and will have even greater influence on the respective (legal) structuring of these processes.
It remains to be seen to what extent the introduced reform proposals by the working group will ultimately be implemented in the law or how they will be changed in detail during the legislative procedure due to the multiple criticism that has already been expressed many times.
Considering a possible retroactive effect of the planned legislative changes, relevant cases should be implemented at short notice.
The reform proposals should already be kept in mind now – especially within the structuring of real estate transactions or other restructurings relevant to real estate transfer tax – so that there are no surprises in the aftermath.