Finance ministers decide on change to real estate transfer tax in share deals

Decision of the meeting of finance ministers on 21 June 2018

A meeting of the German finance ministers on 21 June determined new regulations pertaining to the real estate transfer tax.

This includes, in particular, the reduction of the participation threshold (which has a negative tax effect) of 95% to 90% in share deals, the lengthening of all five-year prior and subsequent retention periods to ten years and the equal treatment of corporations and partnerships in terms of old and new shareholdings.

Moreover, the ministers are suggesting that the prior holding period in Section 6 of RETT be lengthened beyond the period in Section 1 (2a) of RETT, and with it, the advantages of an extended acquisition should be removed, interest will be introduced and the substitute assessment basis will also be applied to sales of properties in retroactive periods of transformation.

According to unconfirmed information, raising or removing the limit on the amount of the delay fine by means of a special statutory provision and introducing suitable examples of how the rules apply to foundations and voting rights agreements are both topics under discussion.

However, the decision was only made by a majority. For example, according to a press release from the senate administration for finance in Berlin, Hamburg called for the decision to be seen only as an intermediate step and to demand other changes if necessary.

Starting point

Beyond that, partnerships may avoid taxable proceedings by making structured use of five-year retention periods before and after the acquisition. They may also make use of exemptions when transferring properties between partnerships and their shareholders.

Politicians have long seen the need for reform of these RETT-blocker structures in share deals. The German finance ministers have now made a decision, as previously described, and requested that the Federal Ministry of Finance enact these changes through the legislative process.

What can be expected?

A concrete draft bill has not yet been written. This is expected at the end of the third quarter of 2018. The finance ministers want the 95% threshold (Section 1 (2a), (3) and (3a) of RETT) for real estate tax to be reduced to 90%. Beyond that, the retention periods before and after the proceedings as per Section 1 (2a) (5) (6) and (7) of RETT should be extended from five years to ten years.

Finally, new shareholder status will also be given to corporations. According to these plans, in order to avoid the tax obligation, it is also necessary for corporations to leave over 10% of their shares in the hands of shareholders who have invested in the company for ten years or more. With this, change of ownership in real estate-holding corporations is equal to change of ownership in real estate-holding partnerships.

In current practice, it is considerable to a certain extent that, with a change in the law, binding information already provided may lose its effectiveness. This change in regulation was to be expected; nevertheless, it is recommended that the implementation of entire plan models be reviewed and adjusted if necessary. In detail:

a) Lowering of the thresholds triggering real estate transfer taxes

Here, it is anticipated that these new thresholds could enter into effect from the moment that Federal Parliament formally adopts the decision; this would mean that only (unconditional) share transfers effective before this point in time would be subject to the old legal regime.

A true retroactive application of the new thresholds to a point in time prior to the formal adoption of the resolution by the Federal Parliament should not be permitted and can thus be fundamentally ruled out. What cannot be ruled out is legislators changing the publishing date of the bill and thus pushing back the introduction of the new limits. We therefore assume that the transfers of shares amounting to more than 90% (but less than 95%) already carried out will, at any rate, not be deemed taxable retroactively through the amendment of the law.

However, taxation cannot be ruled out in the event that share deals includes suspensive conditions and the point in time of taxation therefore inadvertently “wanders” to a date past the resolution by the Federal Parliament or the publication of the bill. In such cases, as well as in the event that, contrary to our expectations, a retroactive regulation is indeed introduced and unwanted taxes arise, there should be options at the ready to reverse all current share deals. Nevertheless, in order to ensure a tax refund in the event of the reversal of a transfer, the original (and, as per the old legal situation, non-taxable) acquisition should be duly reported to the pertinent real estate tax office no later than 14 days after the closing of the share deal contract.

b) Extension of the retention periods before and after the transfer

The extension of the retention periods before and after the transfer means that, for example, the acquisition of a property by a shareholder’s own partnership is only exempt from real estate transfer tax as long as said shareholder was a consistent member of the partnership during the ten years prior to the acquisition (instead of the previous requirement of the last five years). In this case, a retroactive effect should be accounted for.

This means that the introduction of the new deadline through the amendments to the law will lead to all deadlines until now being extended correspondingly. As an example, should the tax-fee transfer of a property be planned for 2019 because a five-year retention period will expire that year, then, in accordance with the current plans, the transfer should be postponed until 2024 because that is when the new ten-year retention period prescribed by the reforms will expire.

Should you have questions regarding the planned amendments to the law or the recommended actions discussed above, we would be happy to assist you.