We admit that we didn't expect this important piece of German legislation to be wrapped up and finalised as quickly as it did. In fact, we thought it unlikely it would be enacted in this legislation period, with the Bundestag elections coming up in September. But it did, and the German federal parliament has indeed passed the new law amending the German Real Estate Transfer Tax (RETT) Act, with the changes to come into force on July 1st, 2021.
For years politicians have been struggling to get to to grips with reform of this tax, known as the Grunderwerbsteuer, payable on real estate acquisitions. Once the domain of the federal government and set at 3.5%, the federal reforms of 2006 saw the sixteen individual Länder imposing their own rates, and invariably they have moved in only one direction – upwards - as regional governments desperately look for new sources of tax revenue.
The land transfer tax is now 6.5% in a number of German states (Saarland, Schleswig-Holstein, North Rhine-Westphalia and Brandenburg) after a succession of incremental increases. The tax is uniformly paid by private individuals. Institutional investors are generally able to avail of canny accounting solutions that allow them to buy property assets as share deals and avoid the tax almost completely.
Such efforts are particularly worthwhile for investments of €15m upwards, and buyers have hitherto gone to great lengths and expense to turn assets into companies and avail of the share deal exemption from the land transfer tax.
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.
The new law changes all this.
From July 1st, the threshold will now be lowered to 90% and the minimum holding period will be extended to 10 years, or even in some cases, 15 years. The new RETT rules will be applicable to partnerships as well as to corporations.
The effect of the change in the law is most likely to be a significantly longer holding period for changes in ownership of real estate companies. From July 1st onwards, only a maximum of 89.9% of the shares or interests can be transferred within 10 years of purchase without incurring the RETT. In the case of partnerships, the holding period is 15 years.
The left-of-centre SPD, which has been pushing for an even more punitive version of the new law during its period of coalition with the CDU/CSU party, still hailed the breakthrough as a triumph. SPD member of parliament Cansel Kiziltepe said, "We've finally broke the Union's blockade on this one and secured an important success in the fight against tax avoidance."
Germany's federal states have been complaining about the loss of up to €1bn in additional Grunderwertbsteuer taxes through the use of share deals. Whether this amendment will change things greatly remains to be seen.
Esfandiar Khorrami, partner at Berlin law firm Bottermann Khorrami, expressed his doubt as to the effectiveness of the new ruling. He thinks investors will simply have to find a partner who'll take a 10.1% shareholding, rather than the 5.1% to date - a challenge, but not one that can't be overcome. "These changes won't prevent the use of share deals in the future", he said.
Others have said the new law does not go far enough in ensuring a more equitable playing field between corporations and private individuals, for many of whom the additional tax burden on a house purchase can be a hurdle too far. Jürgen Michael Schick, president of the housing association IVD, said, "Where the legislator tightens the taxation of share deals without at the same time easing the burden on buyers of owner-occupied housing, he is obviously not concerned with tax justice, but only with increasing his revenues."
There are scant figures available for just how many real estate transactions are carried out as share deals in Germany each year. However, it is well known that many property and project developers take advantage of share deals frequently. They buy land, construct the building, and then sell on the finished property to an investor.
According to Jochen Schenk, CEO of Munich-based investor Real I.S., "If they (developers) didn't have the option of handling such transactions as share deals, the construction project would become more expensive by up to more than 12%, because the Grunderwerbsteuer would be due both on the purchase of the land and the sale of the property.”
Schenk's point is that project developers and builders usually have little equity capital. If, in the future, they had to retain an interest in properties for longer in the case of share deals, this could lead to property developers noticeably reducing their activities, as they would not be able to use the capital tied up in share deals elsewhere.