The coalition agreement of 14 March 2018 provides for certain arrangements for avoiding real estate transfer tax (GrESt) by means of share deals to be restricted. The background to this are currently common arrangements in which real estate transfer tax can be largely or completely avoided in the case of indirect property transfers through the transfer of shares. At the conference of finance ministers on 21 June 2018, important tightening of the Real Estate Transfer Tax Act was proposed:

  • Lowering the relevant real estate transfer tax participation limit of 95% to 90% for share transfers
    • in the case of property-holding partnerships, to new shareholders within (currently still) five years (cf. Section 1 (2a) GrEStG) and
    • in the case of mergers of shares in real estate holding partnerships (Section 1 (3) GrEStG)
  • Extension of the relevant (Holding) periodsof the company shares from five to ten years (or possibly even for 15 years) in the case of property holding companies.
  • Introduction of a Substitute offence for real estate holding corporationsn, so that a change in the shareholder structure of at least 90% within ten years also triggers real estate transfer tax.

The following two fundamental Design approaches in the context of the structuring of transactions with landowning companies are current legal situation of practical importance:

  • Staggered acquisition of the shares in properties held by Partnerships
    • Observance of the restriction in Section 1 (2a) GrEStG: Transfer of at least 95% to new shareholders within five years is detrimental.
    • Organisation: Acquisition of 94.9%, leaving 5.1% with the existing shareholder and acquisition of the remaining 5.1% after five years.
    • However, the subsidiary application of Section 1 (3) GrEStG must be observed; if the acquisition of (an additional) 5.1% of the shares is accompanied by a merger of shares, this is subject to real estate transfer tax.
  • "Club Deals" for properties in the assets of Corporations
    • § Section 1 (2a) GrEStG not applicable (five-year period irrelevant)
    • In principle, 100% can be transferred immediately to different purchasers without incurring property transfer tax. In turn, a permanent consolidation of shares must be avoided, i.e. club deals with unconnected 5.1% co-investor are always favourable from the perspective of the GrESt.

The planned changes and their expected effects are summarised briefly:

  • In the case of staggered acquisition of shares in landowning companies  Partnerships the restriction of Section 1 (2a) GrEStG [as amended] would have to be observed in future. Accordingly, a share transfer of at least 90% within ten years to new shareholders already trigger real estate transfer tax. Corresponding arrangements to avoid or reduce the real estate transfer tax burden would therefore have to take a much longer period of time.
  • At "Club Deals" with shares in landowning companies Corporations would in future be Section 1 (2a) GrEStG [as amended] additional would be applicable and the ten-year period would have to be observed. Previously common arrangements with an independent co-investor would then no longer be advantageous.

The publication of the draft bill remains to be seen. It cannot be assumed that the legislation will introduce generous transitional regulations. Property developers, portfolio holders and investors should therefore consider the planned changes at an early stage and bring forward planned transactions if necessary. In addition, the effects on contracts that have already been concluded should be analysed and appropriate measures possibly taken. This also applies to transactions that took place some time ago, which could be affected despite the grandfathering and prohibition of retroactive effect.

Yours TAXGATE team will be happy to provide you with further information at any time.