We report regularly in these pages about the ongoing efforts of politicians to get to grips with reform of the Grunderwerbsteuer, or property transfer tax, 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 will now go 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. However, ministers have recently been 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.’
Attempts to reform the thorny issue of the Grunderwerbsteuer have been kicked around for years. Most recently the Finance Minister of Lower Saxony, Reinhold Hilbers (CDU) spoke out against any attempt to cobble through a compromise deal before federal elections in September, saying that his concern is that any agreement would be at the expense of corporation. His CDU party, along with sister Bavarian party CSU, are in principle open to reform, but won’t countenance any threshold below 90%.
In Hilbers’ view, the latest proposals envisage subjecting corporates to the same treatment as partnerships, for which there are a catalogue of legal exceptions – but which corporates would not be able to avail of. That’s unfair, he says, saying “That’s wrong and needs to be changed. If you’re going to tax corporates, then you also have to grant them exemptions. My colleagues in Bavaria, North Rhine-Westphalia, Saxony, Saxony-Anhalt and Saarland see it the same way.”
His view, shared with other party colleagues, is to instead abolish the Grunderwerbsteuer, which can often be a crippling additional cost for a family trying to buy a home. The government is trying to raise home ownership by granting building subsidies and (until end-March) offering Baukindergeld (a payment per child) to incentivize home-buying, but the up to 6.5% extra tax on purchase is a hurdle too high for many. It looks like the reform talks are set to go on and on.