German finance ministers crack down on share deals

Germany’s finance ministers have called for more stringent regulation regarding real estate share deals, as pressure builds from politicians to close a controversial tax loophole.

At their conference in Berlin last week, the majority of regional finance ministers voted for tougher regulation, a ruling that finance ministers Edith Sitzmann (Baden-Württemberg), Monika Heinold (Schleswig-Holstein) und Bremen’s finance senator Karoline Linnert heralded as ‘an important first move’ and a sign that the Germany is keen to stamp out tax-avoidance models in favour of fiscal justice.

In a share deal, a property – often the only asset a company has – is sold off as shares. Typically, the buyer will hold 94.9% and the seller will keep 5.1% for a five-year period. However, ministers are now proposing that if a stakeholder holds more than 89.9%, it will become taxable. In addition, ministers have proposed that no stakeholder should hold more than 90%.

‘The Finance Ministry has said that share deals will become more difficult, with holding periods longer than the current five years, although we don’t know what their timeline for this is,’ Tobias Schneider, a partner at law firm CMS in Stuttgart, told REFIRE. ‘However, these changes will make share deals less attractive as an option. The advantage of a share deal today is that no transfer tax is payable. If the Finance Ministry brings in the proposed changes, the buyer will have to think carefully about the additional complexities.’

Ministers are also proposing that shares should be held for at least 10 years (and as long as 15 years) instead of five years today. ‘Players in the market might not want to be bound for such a long time,’ Schneider said. ‘The reason for this is not so much the costs, but mainly for reasons of flexibility and limited investment periods.’

Sitzmann has been particularly vocal in her desire to minimize share deals: ‘The constitution sets out some limitations,’ she said. ‘Still, I am convinced that, with stronger regulation, we’ll be able to curb any financial shenanigans. That way, we’ll make share deals as unattractive as possible.’

Share deals can be complex because a buyer is essentially buying a company together with its history, including all potential liabilities. ‘Therefore, you will usually have higher due diligence costs. Structure costs are also usually higher compared to an asset deal,’ Schneider said.

Schneider, for one, is not a fan of the proposed changes: ‘Personally, I would like the government to leave the current share deal set-up as it is but that is not the popular opinion of politicians. Tax law gets more and more complicated and even the tax authorities find it hard to monitor. It’s just not practical.’ (ssk)