Managing Associate Germany
"The Bill introduces a further new taxable event regarding the transfer of shares in corporations owning German real estate."
After several years of political discussions, a first draft bill was published in 2019 to tackle these supposedly “RETT-avoiding transaction structures”, which has now concluded with a final bill passed by the German Parliament (Bundestag) on 21 April 2021 (“the Bill”). Approval by the Federal Council (Bundesrat) is expected to be granted at the next session in May. The Bill introduces a further new taxable event regarding the transfer of shares in corporations owning German real estate and significantly tightens the existing rules for RETT-free share deal transactions which are possible under the existing legislation.
The Bill will become effective as of 1 July 2021.
New specific event triggering RETT for share deals regarding corporations
Under the current law, the (direct or indirect) consolidation in one person or transfer to one person of at least 95% of the shares in a corporation owning real estate located in Germany (the “Real Estate Corporation”) triggers RETT.
Under the Bill, RETT will also be triggered if (directly or indirectly) at least 90% of the shares in a Real Estate Corporation are transferred to new shareholders within a period of 10 years. Therefore, this new rule also covers several share transfers to different persons, not only the initial transfer to one acquirer (this is similar to the RETT burden under the current law regarding partnerships which own real estate located in Germany).
Example 1:
80% of the shares in X-GmbH are transferred to a new shareholder in 2022 and another 10% of the shares transferred to another new shareholder in 2025. X-GmbH has several wholly-owned corporate subsidiaries owning real estate in Germany. The second transfer falls under the new RETT rule since at least 90% of the shares in the real estate-owning subsidiaries have been indirectly transferred within 10 years.
However, as recommended by the financial committee of the German Parliament (Bundestag), transfers of shares in corporations which shares are listed at a recognised stock exchange will not be subject to the new RETT rule.
Other significant changes to the current RETT Act relating to share deals
The current threshold for share deals with transfers of participations cumulatively below 95% will be reduced to 90% and transfer time periods extended considerably from five years to ten years (and even to 15 years in one particular context – see below).
Event triggering RETT resulting from consolidations
As mentioned above, a RETT-triggering event will occur under the current law if (directly or indirectly) at least 95% of the shares in a Real Estate Corporation are consolidated in one person or transferred to one person. This is also true in respect of partnerships owning real estate located in Germany (a “Real Estate Partnership”). With the reduced threshold under the Bill, a RETT-triggering event will occur if at least 90% of the relevant shareholdings/participations are consolidated in one person.
"The participation threshold will be reduced to 90% and the time period to be considered for any transfers extended to ten years."
Specific event triggering RETT for share deals regarding partnerships
Regarding Real Estate Partnerships under the current law, the (direct or indirect) transfer of participations in a Real Estate Partnership of at least 95% within a period of five years will also result in a RETT-triggering event.
Under the Bill, the participation threshold will be reduced to 90% and the time period to be considered for any transfers extended to ten years. It should be noted that, if the currently applicable five-year period has not expired for the relevant transfers before 1 July 2021, it will automatically be extended to ten years.
Example 2:
On 1 July 2017, a purchaser acquired 80% of real estate-owning partnership (GmbH & Co. KG). After five years, in 2022, other investors acquire the remaining 20% in GmbH & Co KG. Since the currently applicable five-year period will not have expired before 1 July 2021, the transfer period will be extended to 10 years, resulting in an RETT-triggering event as the additional transfer of 20% will exceed the 90% threshold. Thus, it may be prudent to transfer the remaining 20% of the participations on or after 1 July 2027 in order to avoid RETT.
If a RETT-triggering event occurs in respect of a transfer of property between a partner and its Real Estate Partnership, a full or partial exemption may apply. Such an exemption requires participation periods of five years prior to or after the respective transfer event.
With the amendments under the Bill, the application of these exemption rules will likely become rare as the participation period may lengthen up to a total of 25 years. Under the Bill, both the participation period prior to and after the respective transfer event will be extended to ten years. However, in respect of a RETT triggered by consolidation of the participations in the Real Estate Partnership in one person, the participation period prior to the respective transfer event will be extended to 15 years.
"Investors investing in companies owning German real estate or companies which invest in German real estate-owning companies should be aware of the new regulations to be introduced once the Bill is approved."
If the five-year participation periods have not expired by 1 July 2021, they will automatically be extended. In the case of additionally acquired participations in which at least 90% are consolidated in one person after 1 July 2021, the exemption rule will only apply to the already-held participations if these already-held participations were acquired at least 15 years prior to the acquisition of the new, additionally acquired participations.
Example 3:
On 1 July 2017, a purchaser acquired 94.9% of real estate-owning partnership GmbH & Co KG, as well as all shares in its general partner (GmbH). At the same time, the purchaser received a call option on the remaining 5.1% exercisable from 2023 onwards. If the purchaser exercises their call option in 2023, RETT will be triggered on full acquisition (100%) as the 94.9% participation had not been held for 15 years prior to the respective transfer event in 2023. The longer participation period applies due to the fact that the currently applicable five-year period will not have expired before 1 July 2021. To obtain a partial exemption, the remaining 5.1% would need to be transferred on or after 1 July 2032.
Practical impact
Going forward, investors investing in companies owning German real estate or companies which invest in German real estate-owning companies should be aware of the new regulations to be introduced once the Bill is approved. In particular, the reduced 90% threshold and the extended holding/participation periods should be taken into consideration ahead of making such investments.
For existing investments, any envisaged transfers should be reviewed in light of the new regulations, including the extensions of holding/participation periods, which may also catch any option rights that may become exercisable in respect of real estate transactions.