The thorny issue of share deals and the avoidance of Grunderwerbsteuer, or land transfer tax, is a subject we have addressed several times in these pages. The matter has been kicked around in government circles in Berlin for years. Now the government of Baden-Württemberg are stepping up the pressure to crack down on what they see as a tax avoidance model, in favour of more 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%.
Two years ago at a conference in Berlin, 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 at the time as ‘an important first move’. But since then nothing much has happened.
Speaking to REFIRE at the time, Tobias Schneider, a partner at law firm CMS in Stuttgart said, ‘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. 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 were 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.’
Among the most vocal politicians pressing for change is Edith Sitzmann of the ruling Green Party for Baden- Württemberg in Stuttgart. ‘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.’She is demanding a much speedier reform of the tax, involving not prohibition of share deals, but subjecting them to their own real estate transfer tax.
The real estate industry is by and large in favour of maintaining the current legal framework. Industry lobby group ZIA Zentrale Immobilien Ausschuss recently stated that the proposed new regulations were "unsuitable and largely unfulfillable" precisely because corporate restructuring was made more difficult. But also because it will entail an immense additional administrative burden for companies and the tax authorities.
"The threatened additional real estate transfer tax burden, which ... also affects project development, would also be counterproductive in the effort to create more living space and reduce the costs for users," said ZIA in a statement. As the real estate industry sees it, the main purpose of share deals is to avoid unnecessary tax burdens on companies in the event of restructuring or sales.
Dr. Hans Volkert Volckens, Chairman of the ZIA Committee on Tax Law, (and in his day job head of real estate at consultants KPMG), pointed out that share deals are not abusive tax arrangements - "as some politicians like to portray". According to Volckens, just because a change in the law is desired in terms of tax morality does not mean that the application of the existing legal situation can be called abusive. "The industry will not be pushed into such a corner”, he said.
Putting a figure on the number of real estate transactions that take place in Germany every year as share deals is difficult. However, it is acknowledged that property developers and project developers are among the players who use share deals most frequently. They buy land, realize the construction project and sell the finished property to an investor.
According to Jochen Schenk, CEO of Real I.S. AG, "If they did not have the opportunity to handle such transactions as share deals, the construction project would be up to more than twelve percent more expensive, because land transfer tax would be due both when the land is purchased and when the property is sold.”
Project developers and property developers usually have little equity. If they had to remain invested in properties for ten years in the future, developers could reduce their activities considerably, as they would not be able to use the capital tied up in share deals for other purposes, said Schenk.
For the moment Berlin’s ruling Grand Coalition has yet to agree on any amendment to the land transfer tax, but pressure is mounting to tackle the issue and agree on something during this legislation period at the latest.
