German government gears up to put kibosh on share deals

The German government is gearing up to abolish share deals that enable corporations to wriggle out of paying the Grunderwerbsteuer - or property transfer tax - that regular citizens are obliged to pay, in a move that would generate a sizeable windfall for Germany’s federal states.

In response to a request on the part of Germany’s Alliance ’90 and Green Party, the German government has said that proposed solutions will be presented at the Finance Ministry’s conference on 19 October this year.

The property transfer tax has been the subject of heated debate in Germany, because while private individuals have no choice but to pay it when they buy a home, many companies dodge it by availing themselves of share deal exemptions when they buy properties. It is estimated by the German government that of all the residential portfolios comprising more than 800 units transacted between 1999 and 2016 in Germany, share deals were used in 71% of cases. In 35% of deals, buyers acquired less than 95% of shares but in 36% of deals, they actually acquired more than 95% of shares, according to the German government.

Unsurprisingly, the loophole is costing German states a fortune in lost revenue. Thomas Schäfer, Minister of Finance in Hesse, and a leading advocate of the drive for change, estimates that the property tax loophole is costing German states around €1bn a year countrywide. As a result, he said last month that Hesse’s Black-Green coalition supports the closing of the loophole. Finance ministers in other federal states are also willing to address the problem on the back of his initiative, Schäfer said.

The property transfer tax can range from 3.5% to 6.5% depending on the federal state, but most states have steadily increased the rate to close to the higher level since 2006 when the government in Berlin decentralized the setting of the rate to the individual states. Only Bavaria and Saxony have held the rate at 3.5%.

Other politicians have also been quick to criticize the loophole. According to Jörg-Uwe Hahn, spokesman for the FDP Party, it has been unnecessary for federal states to increase the rate of property transfer tax since 2013, not least because they already pulled in €5bn more in property transfer tax revenue since then than they anticipated. Subsequently, it is ‘even less justifiable for many states to charge the upper rate of 6.5%’, according to national property association IVD president Jürgen Michael Schick.

The FDP in Hesse is also considering introducing tax reforms, such as a tax exemption on a property valued at up to €500,000 that will be occupied by its owner, Hahn said. Schäfer estimates that this could lead to a yearly loss of revenue in the region of €530m.

And while many companies have taken advantage of the loophole to avoid paying the property transfer tax, the tax has nevertheless been a goldmine for Germany’s federal states, largely as a result of private individuals buying their own home. Last year, German states raked in a record €12.4bn in Grunderwerbsteuer, an increase of 10.2% over 2015, based on the €240.5bn of property transactions across the country. The volume of transactions was also up 9.6% on the previous year, according to statistics compiled by the IVD. Bavaria topped the list of states with a turnover of €50bn, while Saarland had the highest proportional rise of 39%.

One peculiarity of the property transfer tax is that monies raised are kept by each federal state and are not treated as revenue for the purposes of Germany's Länderfinanzausgleich, the mechanism whereby transfers take place among Germany's states, from the wealthier to the poorer, to balance out standards of living across the country.

The hike in property tax coupled with a broker fee in Germany that often exceeds 7%, not to mention notary costs and land registration fees, is making it increasingly different for people on lower incomes to get on the housing ladder. As a result, the rate of home ownership among lower earners fell from 25% to just 17% between 1990 and 2014, according to the Cologne Institute for Economic Research (IW).