Investment fund managers should pay close attention and assess their holding structures for needed changes
The German Real Estate Transfer Tax ("RETT") rules have been well-known for quite a while now for their vast complexity which makes them difficult to handle even for the German tax authorities. This was particularly true after the last German RETT reform in 2021. Nevertheless, the German Federal Ministry of Finance has now again submitted a draft bill for a reform of the German RETT Act ("RETTA Draft"). According to the ministry, the main reasons for the draft are:
- a change in German civil law rules pertaining to partnerships (i.e., the abolition of co-ownership (Gesamthand) as from 1 January 2024) which has prompted the ministry to now apply the same RETT rules irrespective of legal form of the real estate holding entity; and
- the fact that the current rules would still "allow RETT avoidance while impeding economically reasonable intra-group reorganisations" with which the ministry express dissatisfaction.
The draft is currently in a very early stage, in consultation with the federal states (Bundesländer), and it is still unclear if and in which form it would ultimately be adopted.
Key features of the RETTA Draft
If adopted, the RETTA Draft would result in a fundamental change in the approach to German RETT, as inter alia:
- The provisions stipulating the current shareholding thresholds (of typically 90%) and holding periods (of typically 10 years) relating to the direct and indirect transfer of company shares and partnership interests (sec. 1 para 2a, para. 2b, para. 3 and para 3a RETTA) would be repealed in their entirety.
- Instead RETT would become chargeable if 100% of the shares/interests in an real estate owning entity (irrespective of their legal form) are directly or indirectly (i.e. via the transfer of shares/interests in so-called intermediary entities which themselves would hold shares/interest in an real estate owning entity) agreed to be transferred (or transferred) to, or agreed to be combined (or combined) in the hand of, one purchaser or a group of purchasers (Erwerbergruppe) coordinating with each other; in order to calculate the new 100% threshold, however, so-called serving shares/interests shall be disregarded.
- German funds which are set-up not as legal entities but as contractual asset pools (Sondervermögen), also known as Contractual Funds, would explicitly be included into the taxation regime of RETTA Draft and treated as real estate owning entities or intermediary entities; this is in contrast to current rules under which only the asset manager which owns the real estate for civil law purposes is relevant for RETT purposes.
- The RETT exemptions for the transfer of real estate between partners and their partnerships (sec. 5, 6 and 7 para 2 RETTA) as well as the very narrowly scoped exemption for certain intra- group transfers (sec. 6a RETTA) would be replaced by a new tax exemption which would apply irrespective of legal form.
In more detail:
In order to cover as many transaction types as possible the RETTA Draft introduces a number of new definitions part of which are still rather unclear, inter alia:
- A Group of Purchasers (Erwerbergruppe) would be defined as a group that coordinates their purchases with each other, while according to the wording of the draft rules, it would "not be necessary that all members of such group have coordinated with each other".
- A Serving Share/interest (which would be disregarded for the purpose of calculating the 100% threshold) would be defined as a share or interest in a real estate holding entity or an intermediary entity held by a person which would not form part of a Group of Purchaser but would hold such share/interest for the benefit of a Purchaser or a Group of Purchasers. Most notably, this would not require trustee agreement or similar arrangement, it would instead be "typically" sufficient inter alia if (i) the value of such Serving Shares/interest is lower than the RETT that would be triggered by an acquisition of 100% of the relevant real estate owning entity or (ii) if a joint venture agreement would limit the shareholder rights of the person holding the Serving Share/interest.
The proposed new rules for Contractual Funds would lead to far-reaching changes for funds investors as they could no longer rely on not triggering RETT when transferring fund units. Moreover, the RETTA Draft also indicates that a Contractual Funds' real estate may still also be allocated to the asset manager for RETT purposes. This could result in RETT becoming chargeable two times in certain situations and is certainly one of the points that would need to be addressed in the further parliamentary process.
It is currently planned that the RETTA Draft would come into force on 1 January 2024 and would in principle apply to all transactions made after 31 December 2023. However, this timetable appears to be rather challenging and it is yet to be seen if it will be adhered to.
The RETTA Draft would result in an almost complete overhaul of the current RETT rules, and some federal states have already expressed their concerns. It is therefore currently unclear how the co-ordination with these states will take place and whether the draft of the RETTA Draft in its current form will be introduced in the German Bundestag and subsequently in the Bundesrat. Investors should nevertheless follow the process closely and assess their current holding structure for any necessary changes once the final form of this most recent German RETTA reform has become more clear.