German Real Estate Transfer Tax (RETT) on Share Deals

Changes as of 1 July 2021 and Stock Exchange Clause

Even though the proposed changes to the German RETT treatment of share deals had seemed to be stopped by the end of 2019, they shall now be enacted shortly. The corresponding legislative process, including the approval by the Upper House of Parliament (“Bundesrat”) shall be completed by June 2021 at the latest. The new measures shall then to come into force on 1 July 2021.

Planned Measures: Overview

In particular the following three measures will likely become relevant:

• The extension of the “Changes in Ownership”-Regime to corporate companies. Currently this regime is applicable to partnerships only.
• The reduction of the participation thresholds from 95% to 90%.
• The extension of the previous five-year periods to ten years, especially in connection with the “Change in Ownership”-Regime.

Planned Introduction of the “Changes in Ownership”-Regime for Corporate Companies

Relevance also of Numerous Minority Transfers

By far the most important change should be the extension of “Changes in Ownership”-Regime from partnerships to corporate companies. Such regime requires the transfer of 90% of the shares within a 10-years supervision period. Such transfer can be realised by a large number of minority transfers; all to different shareholders. For example, it is sufficient if 900 times (different) 0.1% of the shares are transferred. In contrast, multiple transfers of the same share (e.g. 900 times of the "same" 0.1% share), will not be harmful if there are no further transfers of shares that lead to the 90% threshold being reached or exceeded.

Irrelevance of Share Transfers to “Long-Term Shareholders”

Transfers of shares to "Long-Term Shareholders" will be disregarded. Long-Term Shareholders are in particular shareholders which:

• Have already held a share (irrespective of the percentage) in the company without interruption for 10 years at the time of an add-on acquisition; or
• Have already been shareholders in the company prior to the acquisition of the real estate by such company.

Relevance of Indirect Transfers

As applicable for partnerships already, also indirect share transfers shall be relevant. With regard to these indirect transfers, a distinction is made as to whether the intermediary company whose shares are directly transferred is a partnership or a corporation:

• In the case of an intermediary partnership, the "transparency method" applies, i.e. the percentage of partnership interest transferred in the intermediary partnership is multiplied by the percentage of shares held by the partnership in the real estate holding corporate company.
• In the case of an intermediary corporate company, the methodology is different. In this case, all shares held by the intermediary corporate company in the real estate holding company are deemed to have been transferred at the moment when 90% of its shareholders have been exchanged. According to the tax authorities’ view, the timely limitation of 10 years does not apply in this specific context. As a consequence, the monitoring period at the indirect level can be significantly longer than the 10 years stipulated by law (so-called "eternity clause").

In the case of structures with more than two levels, the corresponding procedure is applied from level to level.

Applicability also to Corporate Real Estate and Foreign Companies

The "real estate quota" as well as the sector in which the company owning the real estate operates are irrelevant. The “Changes in Ownership”-Regime will therefore not only apply to companies that predominantly own real estate. For the regime to apply, the company does not have to be a special purpose real estate company that exclusively holds and manages real estate. Instead, it can also be an operational company outside the real estate sector (e.g. a company with an administrative building or production site in Germany).

Also foreign companies with (i) German real estate or (ii) a ≥ 90% holding in another company holding German real estate (deemed real estate) will be affected by the new rules.

Supervision by the Company, not the Shareholders

The real estate owning corporate company itself and not one or more of the shareholders acquiring the shares will be the debtor of the RETT. Accordingly, the company itself must also monitor all share transfers - also at an indirect level. In principle, this even applies to listed companies with numerous changes of shareholders at the direct level. Once the 90% threshold is reached, notifications will need to be made to the tax authorities.

Stock Exchange Clause

A stock exchange clause has been newly introduced in the legislative process, i.e. such rule had not been part of the initial rules proposed in 2019. The Stock Exchange Clause – in very simplified terms – it provides for a double test. Accordingly, share transfers in a listed company are not taken into account for calculating the 90% quota if:

1. The company's shares are admitted to trading on a regulated market (e.g. for Germany the Prime or General Standard of the Frankfurt Stock Exchange, but not the Open Market or Scale segment for growth shares); and
2. The transfer of shares takes place as a result of a transaction on such a market or a Multilateral Trading Facility (MTF) within the meaning of MIFID II / MIFIR. For Germany, this should include almost all major trading platforms, i.e. in addition to stock exchanges, Off The Counter (OTC) trading via platforms such as Baader Bank, Commerzbank and Lang & Schwarz.

Admissions for being traded via regulated EU markets or share transfers by means of transactions via corresponding MTFs in the EU may also fall under the scope of the Stock Exchange Clause. The same applies to equivalent third-country trading markets. However, only the US, Hong Kong and Australia are currently included as the relevant third-country trading list. The UK and Switzerland, for example, are therefore excluded.

Comments on the “Changes in Ownership”-Regime

Real Estate Sector / Prevention of the Previous RETT Blocker Models

The introduction of the “Changes in Ownership”-Regime will probably prevent the previous RETT blocker models relating to corporate companies from being implemented in future. Up to now, it has been common practice for a main investor to acquire up to 94.9% of the shares in a real estate corporate company. The remaining shares (at least 5.1%) are acquired by a co-investor. In the absence of a unification of at least 95% of the shares under currently applicable law, no RETT is triggered.

Under the envisaged law, RETT can only be avoided if a seller retains at least 10.1% of the shares for a period of at least 10 years. The 10.1% shareholder must remain invested for more than 10 years if the other 89.9% are intended to be transferred further within the next 20 years. It may therefore be that the 10.1% shareholder must remain invested “eternally” if the residual 89.9% shall continuously be transferred.

If the seller retaining the 10.1% is a company or partnership, it must also be taken into account that an effective control over indirect changes in ownership must be possible in order to keep the 10.1% stable. Otherwise, RETT may be triggered accidentally irrespective of the (direct) retention of the 10.1%. Conversely, 10.1% shareholders which cannot trigger indirect changes, e.g. individuals, certain types of trusts, governmental bodies or other public corporations, tend to be suitable as 10.1% minority investors.

Non-Real Estate Sector / Limited Monitoring and Prevention Possibilities

Problematic with regard to the new “Changes in Ownership”-Regime are the collateral damages, i.e. the fact that RETT can triggered even in the absence of a certain transaction that aims at acquiring a majority share in a real estate holding company. Because of the broad coverage of the new RETT rules, real estate owning corporate companies, even beyond the real estate sector, will have to establish a monitoring system. With such system, future changes in ownership, both directly and indirectly, need to be identified. Admittedly, this monitoring will have practical limits beyond (uncontrolled) transfers at a stock exchange.

Timely Application / Grandfathering Rules

The planned new rules are scheduled to come into force as of 1 July 2021. As a result, it seems possible to continue implementing the existing RETT blocker models for corporate companies (94.9% + 5.1% co-investor) before this date. The signing as well as the completion must have taken place until the 30 June 2021 then.

From 1 July 2021 onwards the new rules will apply. The proposed law contains various provisions in relation to the first-time application. The most important ones are the following:

• Irrelevance of share transfers under the new “Changes in Ownership”-Regime for corporate companies prior to 1 July 2021: All transfers prior to the aforementioned date shall be disregarded. This is important because a transfer of a 1% interest in the shares from 1 July 2021 will trigger RETT if 89% has previously been transferred. According to the wording of the provisions, it could be questionable – in contrast to the legislative intention - whether transfers at an indirect level are also disregarded. Further, the provisions do not automatically consider shareholders being invested on the 1 July 2021 as “Long-Term Investors”.
• Prevention of "transition winners": The 95% thresholds must continue to be monitored in parallel to the 90% in the future.
• No extension of already lapsed timely limits (grandfathering rule): In cases where a five-year timely limit under the currently applicable rules has already expired, the new, extended timely limits of 10 years shall not apply.

Further Notes

Except for covering the new “Changes in Ownerships” related to corporate companies, no changes are planned for the Group Exemption Clause, i.e. for intragroup real estate transfers within a 95% group. In particular, the timely limits (pre- and post-retention periods) remain at five years. Also the relevant percentage will not be reduced to 90%.

Furthermore, the "eternity clause" in case of indirect changes of shareholders (unlimited supervision period according to the tax authorities’ view) shall not me modified by law.