Federal Ministry of Finance publishes draft tax bill outlining new measures effective 1 January 2020.
By Tobias Klass
The Federal Ministry of Finance has released its first draft tax bill on the contemplated real estate transfer tax (RETT) reform, setting out the general framework to which market participants must conform. German political debate has focused on strengthening German RETT laws for some time. The Conference of the German Ministers of Finance added weight to this political debate in June 2018, requesting that tax department heads of the federal and state ministries of finance transfer the resolution into a draft bill. Consequently, market participants have structured transactions to account for considerable uncertainties as regards RETT consequences.
The proposed draft measures are consistent with those outlined in June 2018, however, for the first time, market participants are gaining more clarity about when the new rules likely will apply. Generally speaking, the new rules will only apply to transactions as of 1 January 2020.
- Reducing the ownership interest threshold from 95% to 90%
For all corporate supplementary provisions the respective ownership interest will be reduced from at least 95% to at least 90% of the shares.
- Increasing RETT time limits from five to 10 years (or even 15 years)
All RETT time limits will be collectively increased from five years to 10 years. Moreover, the required prior holding period of a RETT exemption for existing partners — in case of direct and indirect unification of all interests in a real estate holding partnership in the hands of one partner — will increase to 15 years. This increase is aimed at further impeding transactions in which an investor is set to acquire shares in a real estate holding partnership in a staggered approach. Overall, a substantially longer participation of a seller is required to allow for RETT neutral share transactions.
- Extending the supplementary provision regarding partnerships to corporations
The supplementary provisions for changes to the shareholding that are currently only applicable to partnerships will be extended to corporations. As a result, mere changes in shareholders of property-owning corporations in a minimum amount of 90% of the company’s capital within a period of 10 years will trigger RETT, irrespective of whether a shareholder directly or indirectly acquires 90% of the shares. Accordingly and as expected, 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.
Notably, however, the new provision will not be supplemented by the current exemptions applicable to partnerships and their partners, which would lead to substantial imbalances and systematic incoherence. In addition, the new rules will affect all companies holding real estate and not just the real estate industry, and will trigger substantial concerns regarding a law enforcement deficit in case of listed companies.
- Setting the timeframe for when the new rules will apply
Market participants, however, will be pleased to hear that the Federal Ministry of Finance does not intend to enact the new rules retroactively, as discussed previously. Generally speaking, the new rules will only apply to transactions as of 1 January 2020.
There are, however, transitional rules for staggered transactions. The current rules continue to be applicable if the underlying purchase agreement has been signed within one year prior to the official introduction of the bill into the legislative process of the German parliament (due this summer) and if closing the transaction has occurred within one year of such date. A grandfathering rule is required to protect reliance on existing laws, but the draft transitional rule is in fact a narrow measure only giving rise to constitutional concerns.
In order to avoid “reform beneficiaries”, the current rules will continue to apply to participations between 90 and 95%. However, partners in a real estate holding partnership who have already reached the status of a so-called existing partner due to the lapse of the five-year holding period will not have this status revoked. For other market participants, though, the holding period will be extended to 10 years (or even 15 years, see above).
How these draft measures will progress through the legislative procedure remains to be seen. For currently pending forward deals it should carefully be considered if the deal specifics would still allow for a RETT-neutral transaction in light of the transitional rules as currently planned or if alternative measures, such as an early closing, is required. Latham will continue to monitor proceedings and will provide updates on any further developments.