Tightened real estate transfer tax regulations for share deals in Germany also will affect hotel investments. The following guidance will help you prepare.
For more than two years, there has been political discussion in Germany of reforming real estate transfer tax (RETT) in the context of share deals.
The political discussion is rooted by the fact that large-scale investors are able to avoid RETT on property transactions through share deals, whilst normally individuals would not have this option in the context of an asset deal. Germany’s State Ministers of Finance have now agreed on the key points for reforming share deals on the basis of a final report by an own working group of their Standing Conference.
According to the latest official information, major adjustments will be:
- lowering of the relevant restrictions on stake from 95% to 90%;
- widening the special provision for shareholder changes in partnerships that own property (property partnership) to include corporations that own property (property corporation); and
- extension of the current holding periods from five to 10 or even 15 years
Lowering the investment level from 95% to 90%
At the moment, a share transaction is subject to RETT if at least 95% of the shares of an entity owning German real property are unified in the hands of one acquirer, or if the shares are already unified by a single shareholder (i.e. 95% or more) and are ultimately transferred to one buyer in one step. An investor can bypass RETT when acquiring shares in a corporation holding German real estate, if he only acquires less than 95% of shares in the property corporation directly and if the remaining shares are acquired by an unrelated co-investor. According to the working group’s proposal, the investment level is to be reduced from 95% to 90%. Consequently, a main investor would have to limit its direct holding in a corporation that owns property to less than 90%, in order to avoid RETT in the relevant transaction. In addition, the following proposed change will have an impact on share deals involving corporations holding German real estate.
Extending the special provision for property partnerships to include property corporations
As the law presently stands, there is a special RETT rule for partnerships that own German property. In short, RETT is already triggered if at least 95% of the shares in a partnership that owns German real property are directly or indirectly transferred to new shareholders within five years. The following example is used to give a simplified overview.
- A is the 100% shareholder in a partnership that owns property. In Year One, X acquires 94.9% from A. In Year Three, A sells its remaining share of 5.1% to Y.
- Similar to example 1, but Y acquires the remaining 5.1% after five years of the initial acquisition of the 94.9%.
Concluding, example 1 is subject to RETT, as Y’s acquisition in Year Three leads to a total transfer of more than 95% within five years. In example 2, RETT is not triggered as less than 95% were transferred within a five years period. In addition, an exemption from 94.9% of the RETT after five years is possible, if X acquires the remaining 5.1% after five years as well. Already today, the provision and its five years monitoring period is forcing companies that invest in partnerships owning German real property to take cost-intensive measures, ensuring that they do not unintentionally trigger a detrimental share transfer of 95% or more within five years.
According to the working group’s proposal, in addition to generally lowering the investment limit to 90%, a corresponding special provision would also be introduced for corporations that own German real property.
Essentially, based on the proposed changes, RETT can only be mitigated in future, if in case of a share deal the seller keeps more than 10% for at least 10 years and an indirect share transfer of the 10% must be avoided.
Extending the holding periods from five to ten or fifteen years
The special provision currently in place for partnerships that own property stipulates a holding period of five years and is mainly introduced to counteract tax-saving arrangements. According to the working group’s proposal, all holding periods in the German RETT Act are to be extended to at least 10 years (with the exemptions that apply to partnerships that own property possibly being extended to 15 years). A proposed extension of the holding periods will make possible arrangements for reducing or bypassing RETT on share deals more difficult and will further restrict a company’s flexibility as it would be locked-in for the duration.
Outlook and implications
For the time-being, the measures largely agreed by the Standing Conference of the Ministers of Finance are merely proposals for legal amendments. Following implications can be assumed:
- considerable additional expenses for future share deals; and
- the reduction of the investment level to 90% requires the seller to keep e.g. 10.1%, which will represent a substantial obstacle for new investors and a considerable restriction for existing property portfolios
At the moment, it cannot be predicted when the proposed amendments will come into effect. The protection of legitimate expectations should at least be granted for existing structures and acquisitions structures signed and closed before a government bill is presented to the German Bundestag or Bundesrat. It, however, cannot be generally ruled out that the planned amendments will have retroactive tax repercussions for past transactions.
Regarding the German hotel real estate market, it will furthermore be interesting to observe whether future adjustments to the RETT will have any effects on the transaction market.
Marco Müth, Partner Financial Services Tax – Real Estate Germany, has over 14 years of experience within KPMG and is specialized in alternative investments, real estate, M&A advice and cross-border investments.
Tina Haller, Senior Manager Deal Advisory KPMG Germany, has over 15 years of experience advising clients on hospitality and real estate projects.
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