Planned changes to property share deals - legislative proposal postponed

As a transfer tax, land transfer tax is effectively a state transaction fee for the change of ownership of property. The tax rate has been massively increased in recent years, making it all the more worthwhile to consider ways of avoiding excessive taxation. The usual arrangements via a property holding company ("share deals"; see TAXGATE News from 10 May 2019) instead of direct acquisition are obviously still a thorn in the side of legislation.

The government draft of an "Act to amend the Real Estate Transfer Tax Act" was therefore adopted by the Federal Cabinet on 31 July 2019 with a number of tightening measures. Following a hearing in the Finance Committee of the Bundestag on 14 October 2019, the law was to be discussed on 16 October 2019, implemented by the end of November 2019 and actually come into force on 1 January 2020 in accordance with Article 2 of the draft law. However, the coalition parties have now postponed the reform until the first half of 2020. The consultations in the Bundestag had shown that the draft requires more detailed scrutiny. In particular, the draft contains stricter rules regarding the taxation of share deals. According to the Federal Ministry of Finance, "practice has shown that, particularly in the area of high-priced property transactions, it is always possible to avoid real estate transfer tax through creative measures. The associated tax savings are of considerable importance. [...] The aim of the law is therefore to curb abusive tax arrangements in real estate transfer tax through various individual measures." Planned measures according to the current draft status include

• Reduction of the participation limit from 95% to 90% for new shareholders (shareholders whose five-year holding period has not yet expired when the law comes into force)
• Extension of the retention period from five to ten years
• Introduction of Section 1 (2b) (change of shareholder in corporations)

During the hearing, the leading associations of the German economy had doubted that the draft law would actually effectively reduce share purchases of land and property.

In its statement of 20 September 2019, the Federal Council also called for the following changes to the government draft to amend the Real Estate Transfer Tax Act:

• Addition of a provision to § 1 para. 2a sentence 4 GrEStG-E that only changes of shareholders within the period specified in § 1 para. 2a sentence 1 GrEStG and not indefinitely are decisive for determining the status of a new shareholder in a corporation holding a stake in a land-owning partnership.
• Addition of a so-called stock exchange clause to Section 1 (2a) and (2b) GrEStG-E. However, the shares admitted to trading must represent the majority of the capital. In addition, the shares must be admitted to an organised market in accordance with Section 2 (11) WpHG or an equivalent third-party trading venue. Trading on the OTC market in accordance with Section 48 BörsG or via other organised or multilateral trading systems is not considered sufficient.
• Amendment of Section 1 (2b) GrEStG-E for reasons of legitimate expectations to the effect that share transfers prior to the entry into force of the law are not counted (Section 23 (23) sentence 1 GrEStG-E). The same is required under the protection of legitimate expectations provision of section 23 (23) sentences 2 and 3 GrEStG-E for transactions that were concluded within one year prior to the submission of the draft bill to the Bundesrat and are completed within one year after submission.
• Request for review to amend Section 6a GrEStG in the further legislative process so that restructuring measures within the group can be tax-neutral. In its current form, the Bundesrat believes that the original legislative objective is only insufficiently fulfilled.

The Federal Government is also requested to evaluate, no later than two years after the Act comes into force, to what extent the reduction in the participation threshold from 95% to 90% and the extension of the holding periods from five to ten years has led to the intended changes in behaviour among the market players addressed.

In particular, the introduction of the planned Section 1 (2b) GrEStG for corporations will lead to considerable challenges when planning such transactions.

The new supplementary provision is intended to ensure that transfers of shareholdings in corporations with domestic real estate are also subject to real estate transfer tax in future, modelled on the regulation already applicable to partnerships. If at least 90% of the company's direct or indirect shareholders are exchanged within ten years, share transfers will result in a real estate transfer tax charge for the AG or GmbH.

The associated notification obligation for taxable companies for real estate transfer tax matters, according to which this must be notified within two weeks of becoming aware of the notifiable transaction, leads to a structural enforcement deficit in practice. A tax obligation is imposed on companies that cannot possibly be fulfilled by the taxpayer or the tax authorities. Particularly in the case of widely ramified shareholding structures, companies generally lack the necessary knowledge of indirect changes in shareholdings. Nevertheless, these companies ultimately suffer the economic consequences.

A duty of disclosure regarding indirect changes in the shareholding structure is therefore only effective in conjunction with legally enforceable claims for information or rather with reporting obligations of the companies in which shareholdings change. It will be difficult to enforce such obligations contractually in complex shareholding structures. The introduction of a statutory duty to provide information regarding indirect changes in shareholdings should therefore be considered, according to which information on changes in shareholdings must be provided to the companies subject to real estate transfer tax without being requested to do so.

The effectiveness of the introduction of a stock exchange clause is questionable in this context. Even non-listed companies with shareholders that are themselves listed cannot recognise such indirect transfers.

The planned legislative amendment in the current draft, which is aimed at the share deal, is also not suitable for preventing tax avoidance through unit deals. This is also the conclusion of a study by the Bundestag's scientific services. The experts took a closer look at the unit deal and identified it as a genuine alternative to the share deal.

In a unit deal, units in a fund into which properties were previously transferred are transferred. This is a reallocation or a unit deal. In this sales structure, there is a change of ownership in the fund. Under civil law, however, the ownership of the properties held in the (open-ended) fund does not change, as it is not the unit holders who are considered to be the owners, but the capital management company (KVG) managing the units. For this reason, no real estate transfer tax is regularly payable on unit deals. The prerequisite is that the properties are held in the contractual special assets and a trust solution is chosen.

Under the trust solution, the assets of the unincorporated special fund can be allocated to the KVG, which holds them for the account of the investors as the owner under civil law. Under the trustee solution, the transfer of a property to a special fund leads to a change of legal entity - subject to real estate transfer tax - with the result that the property is owned by the KVG after the transfer. A property investment fund organised under German law in contractual form does not have its own legal personality and does not have its own rights; management is the responsibility of an external capital management company. The KVG manages the fund for the account of the investors in accordance with the investment conditions, which govern the legal relationship between the investors and the management company, cf. section 1(10) of the German Investment Code (KAGB). However, the tax liability on the contribution can be avoided by making the contribution free of charge.

In the event of a subsequent sale of the share certificates by an investor in this case constellation, no real estate transfer tax is then generally payable. The KVG becomes neither the creditor of the claim nor the owner when contracts (under the law of obligations or in rem) are concluded. If the KVG sells a property for the account of the investment fund, the proceeds of the sale automatically become part of the investment fund by operation of law. Various solution models have already been put forward in this regard.

Conclusions for practice briefly summarised:

• Transactions can still be carried out with legal certainty until 31 December 2019 in accordance with the current legal situation; however, careful planning and contract drafting are also essential.
• Acquisitions from January 2020 onwards could already be subject to the stricter regulations and should therefore take the planned new regulations into account as a precaution.
• Particular attention should be paid to the acquisition of additional shares in land-owning companies, as extended holding periods may also have to be observed here.

Your TAXGATE team is at your disposal for the tax-efficient structuring of property transactions and ensures that tax declaration and reporting obligations (e.g. DAC 6 for cross-border arrangements) are complied with. We prepare tax structuring memoranda to safeguard the management or the transaction partners and assist you with binding information and other procedures vis-à-vis the tax authorities.

from Heidrun Nill