The Conference of the German Ministers of Finance has announced measures against so-called share deal structures following the conclusion of the respective technical federal-state working group.
By Tobias Klass
So-called share deal structures have been the focus of German political debate about real estate transfer tax (RETT) for some time. The coalition agreement already contains the governing parties’ political letter of intent to end allegedly fraudulent tax structurings regarding RETT through share deals. The background of said structures are transactions in which land or real estate is not sold directly, but indirectly, by selling the shares of the property holding company. Provided that a purchaser acquires less than 95% of the shares, RETT is not triggered under current law. If a corporation is involved in these structures, a co-investor typically will acquire the remaining shares of more than 5%. Alternatively, if a partnership is involved, the shares remain with the seller, as the mere change of shareholders in the amount of at least 95% of the partnership interests would already trigger RETT. As market participants have merely adapted to the current legal situation, referring to fraudulent structures is generally inaccurate. However, these structures became the focus of tax authorities, rendering them politically targeted.
As a first step, the current resolution of the Conference of the Ministers of Finance dated June 21, 2018 has substantiated the political discussion. The Conference asked tax department heads of the federal and state ministries of finance to transfer the resolution into a draft bill that the federal government will submit to the legislative procedure.
According to reports the following measures are planned:
- Extension of the supplementary provision regarding partnerships to corporations
- According to current law, mere changes in shareholders of property owning partnerships in a minimum amount of 95% of the partnership interests within a period of five years trigger RETT. This is irrespective of whether any single shareholder holds 95% or more of the partnership interests. The plan is to create a parallel provision that will cover changes in shareholders of property owning corporations in the same manner, while the quota will be reduced to 90% (see below). Accordingly, in the future, a full divesture of a property owning corporation to an investor and a co-investor (e.g., an asset manager) would no longer be possible without triggering RETT. The seller would have to remain in the company as a shareholder with more than 10% of the shares, provided that the seller qualifies as a so-called “old” shareholder in the first place. The corporation itself — just like the partnership under current law — will be the debtor of the RETT under such new rules.
- Details regarding the concrete implementation, in particular as to when a shareholder is a so-called “old” shareholder and how indirect structures will be treated, remain unclear. Notably, however, the new provision — as currently reported — will not be complemented with the current exemptions applicable to partnerships and their partners, which would lead to substantial imbalances and systematic incoherence.
- Increase of time limits from five to 10 years
- All RETT time limits will be collectively increased from currently five years to 10 years. Moreover, the required prior holding period in case of RETT neutral transfers of a property from a partnership to a partner, or to another partnership, might even be increased to 15 years. The centerpiece of this measure is the so-called mere change of shareholders (see above). Thus far, this has only triggered RETT if at least of 95% of the shares of a property holding partnership were transferred to new partners within a period of five years. This time period will most likely be increased to 10 years, and will also be applicable to the new rules regarding corporations (see above). Apart from the substantially longer participation of a seller required to allow for RETT neutral share transaction, which will be an issue for fund investors on the sell side in particular, the extension of the time limits to 10 years will be an issue for all current and past transactions. This will especially be the case if the parties have adapted to the five-year period, have entered into corresponding contractual obligations, and have installed measures (e.g., put and/or call options) tailored thereto. A grandfathering should not be expected here.
- Reduction of the 95% threshold to 90%
- Finally, it is planned for all corporate supplementary provisions to reduce the respective ownership interest from at least of 95% to at least of 90% of the shares. This step actually falls short of what was expected as a worst case scenario previously, as a further reduction to 75%, or even 50%, raised constitutional concerns. However, this step will also impede meaningful structures, especially in groups, and will pose further challenges in practice.
Most press releases have paid little attention to additional measures that are likely to also be part of the draft bill. Apart from a number of special issues that tax authorities are averse to (for example the so-called merger model and certain foundation structures), press releases have not referred to the planned standard statutory interest on any open RETT cases in particular. Contrary to income taxes, no standard statutory interest currently applies to RETT. The new standard statutory interest period applicable to RETT — following somewhat the current model for income taxes pursuant to Section 233a of the German Tax Code — is supposed to start three months after the lapse of the RETT notification obligation. This would lead to substantial additional tax burdens that would be hard to justify, particularly with regard to corporate supplementary provisions in cases of larger portfolios or extensive real estate ownership. This is because, at such point in time, an actual assessment of the RETT burden will typically be on the distant horizon, as complicated valuation procedures usually take tax authorities a lot of time to complete. This is particularly relevant given the standard statutory interest rate is currently at 6% p.a., despite the intensive constitutional debate around the interest rate.
The Conference of the Ministers of Finance has asked the tax department heads of the federal and state ministries of finance to implement the planned measures into a draft bill in the short term. The draft bill will then form the basis for the legislative procedures.
Latham will continue to monitor the draft bill and will provide updates on any further developments.