bundesfinanzministerium.de
Finance Minister Christian Lindner
Finance Minister Christian Lindner (FDP) is proposing scrapping the country’s complex real estate transfer tax, according to the latest discussion draft from the Federal Ministry of Finance (BMF).
Lindner is appealing to German states to reduce or completely eliminate the real estate transfer tax for owner-occupied residential property. ‘To enable more people in Germany to live in owner-occupied property, the states will be authorized to make the land transfer tax more flexible in order to facilitate the acquisition of owner-occupied residential property,’ the draft reads.
As such, the finance ministries of the federal and state governments are considering a radical overhaul of the real estate transfer tax that would allow the states to make buying a home for owner-occupation more favourable, which could include complete tax exemption. The draft reportedly provides great leeway for the states in the private purchase of a house or apartment. The only condition would be that they would be used for own residential purposes.
Lindner made his views on the real estate transfer tax clear when he spoke to magazine Der Spiegel in May: ‘If it were up to me, the real estate transfer tax in the states should be reduced to zero,’ he said. ‘The situation in the housing market is socially explosive.’
It's easy to see where Lindner is coming from, particularly at a time when so many people are feeling the pinch. Depending on the federal state, the real estate transfer tax is between 3.5% (Bavaria) and 6.5% (North Rhine-Westphalia, Schleswig-Holstein and Brandenburg). Saarland has raised the tax rate four times in the past twelve years in 0.5% increments from the initial 3.5% to the maximum rate by 2015.
In May this year, the BMF initiated the discussion of a reform of the real estate transfer tax for owner-occupiers, including reduced tax rates. However, the approval of the Bundesrat is required for such a regulation. Moreover, the states have little incentive to do so given that the real estate transfer tax is a lucrative source of revenue. Last year, German states collected more than €17 billion from it – revenue that they are not going to give up without a fight.
Share deals and unit deals under the microscope
Lindner’s plans to overhaul Germany’s real estate transfer tax would also have consequences for share deals and unit deals. The plan is to restrict creative measures in the acquisition of shares in a company holding real estate. Under discussion is the abolition of the 90% acquisition limit and the ten-year monitoring period. Instead, real estate transfer tax would only be triggered when 100% of the shares are acquired. Buyers will be regarded as a single entity ‘if they have coordinated their acquisitions with each other’. However, such a move would open the door to legal disputes because many purchasers would deny that they were acting jointly, which could leave the tax courts facing hundreds of proceedings, according to those who track the market.
Also under review is the double allocation of a property in an investment fund and at the KVG level, which is aimed at reallocations of fund unit certificates or transfers of real estate between investment funds - so-called unit deals. Tax experts have expressed concerns at the ‘considerable legal uncertainties in the area of share deals’.
According to the Kiel Institute for the World Economy (IfW), low real estate transfer tax leads to increased residential construction in the private sector and is more favourable for the German states than financing state-owned new construction on the same scale via higher tax rates: ‘A reduction in real estate transfer tax rates is likely to stimulate residential construction activity, which is currently stalled in view of the interest rate turnaround,’ said study author professor Jens Boysen-Hogrefe, deputy director of the Business Cycle and Growth Research Center at the IfW. According to the study, significantly more new homes were built in countries with low rates than in those with higher rates during the period under review. According to the study, between 2011 to 2020, construction investment in Bavaria was 8% higher on average.
Lower real estate transfer tax drives new residential construction
The study also concludes that the additional revenue generated by the states through a higher real estate transfer tax is generally insufficient to finance as much state housing construction as is lost to the private sector when rates are high. The positive impact of low taxes on real estate deals is well known, according to Boysen-Hogrefe: ‘It appears that a reduction in the real estate transfer tax is also an effective way to specifically drive new residential construction,’ he said.
However, a potential sticking point is that real estate transfer tax revenues are included in the fiscal equalization system of the federal states. This means that if some states abolish the real estate transfer tax for families, this could affect the revenues of the other states. According to Ministry of Finance circles, NRW and Lower Saxony, are among the states that have fiscal concerns about Lindner's bill. Nonetheless, if the states reach an agreement with the Federal Ministry of Finance, the bill could be approved by the federal cabinet on 16 August and enter parliamentary consultation. The land transfer tax overhaul could then be completed by the end of the year.
