In detail

Taxation of share deals

The draft RETT regime provides for a single rule to tax share deals, namely Section 1a RETT-draft, which is applicable to the acquisition of shares in corporations as well as partnerships. RETT is triggered, if a person (or a group of persons acting together) unifies all relevant shares in a real estate owning entity, either directly or indirectly via intermediate entities. This new rule therefore generally follows the concept of the present unification rules (Section 1(3) to (3a) RETTA) with the below described amendments.

The present transfer rule (transfer of 90% of the shares within ten years, according to Section 1(2a), (2b) RETTA) as well as the present unification rules (Section 1(3), (3a) RETTA) would be replaced in full by Section 1a RETTA-draft. Whereby, the monitoring period (currently ten years) and the fixed participation hurdles (currently 90%) would no longer apply under the draft regime.

The presently applicable fixed participation hurdles of 90% would be replaced with the concept of an “acquirer group” acting in concert as well as “serving interest”. The acquisition of all relevant shares by an “acquirer group” is subject to RETT, if the group (at least two (legal) persons) acts jointly in acquiring the relevant shares. The definition of “acting together” is rather broad and leaves substantial room for interpretation. However, acting together by two or more persons as “acquirer group” is generally assumed where the share transfers to the members of the group are linked, either factually or from a timing perspective.

When determining the relevant number of shares that are held by a person (or “acquirer group”) in the target company, shares held by a third party (being no member of the “acquirer group”) on behalf of or for the benefit of the acquirer would be disregarded. Like the definition of “acting together”, the definition of “serving interest” is broad and open to interpretation. However, “serving interest” is inter alia assumed, where (i) the market value of the shares held by a third party is lower than the RETT charge, or (ii) the shareholder rights of the shares held by a third party are limited, or (iii) the profit entitlement of the shares held by a third party is either fixed or a minimum remuneration is agreed.

Taxation of unit deals

In addition, the draft also contains provisions on funds within the meaning of Section 1 paragraph 10 German Capital Investment Code and comparable investment funds under foreign law referring to Section 1b RETTA-draft. Under the current regime, the transfer or unification of the units in such a fund is generally not subject to RETT as under national civil law the ownership of the investment assets is not with the fund but with the fund manager, who is considered as real estate owning.

Under the draft proposal, the investment manager, a fund as well as a sub-fund will be regarded as real estate companies such that the acquisition of the respective units in a fund by an acquirer or an acquirer group could constitute a taxable event under Section 1a RETTA-draft.

Exemption from tax in case of reorganisations within a group

According to the newly drafted Section 5(1) RETTA-draft (successor regulation to Section 6a RETTA), reorganisations can be exempt from tax if the ultimate owner of the real estate asset does not change because of the reorganisation. In practice, transfers within a wholly owned group should benefit from this exemption and could therefore be implemented RETT neutral.

Section 5(2) RETTA-draft (successor regulation to Section 5 RETTA) exempts the transfer of real estate from RETT, where a person or several co-owners transfers their real estate asset to their direct subsidiary company. A five-year clawback period will apply.

Section 5(3) RETTA-draft (successor regulation to Section 6 RETTA) exempts the transfer of real estate from RETT, where an entity transfers its real estate to its shareholder or group of shareholders. A five-year clawback period will apply.

Taxpayer

RETT triggered under Section 1a RETTA-draft would be levied on the respective acquirer or the members of the acquirer group and, if applicable, intermediary companies. The real estate company itself will be secondarily liable for the assessed RETT. Furthermore, the tax charge qualifies as liability in rem (public burden) of the real estate itself, according to Section 13a RETTA-draft.

Taxpayers will be obliged to notify the transaction within a period of one month. If one of the above-mentioned tax debtors notifies the transaction, the other tax debtors are exempt from the obligation to notify.

Our view

The draft proposal comprises a substantial simplification to the present RETT regime in Germany. The present complexities of the RETT regime impacts not only the German real estate industry, but all other corporate groups which hold real estate assets. The implementation of the draft proposal would therefore be a substantial relief to the taxpayers, should offer more flexibility and mitigate undesired multiple RETT charges in corporate groups.

As mentioned above, this RETT reform process is still at an early stage and the federal states will need to agree to the proposed concept. Especially, since the draft proposal no longer relies on strict hurdles or monitoring periods for share deals, it is not yet clear whether the federal states consider the new concepts (i.e., “acting together” and “serving interest”) sufficiently robust to be applied in practice. Moreover, the timetable for the implementation of the draft regime as per 1 January 2024 is very ambitious, remembering previous RETT reforms, which were rather time-consuming.

Real estate investors should observe this process closely, as the draft proposal would have a significant impact on the German real estate industry.