The German federal government and the federal states have set up a joint working group to examine the possibility of lowering the threshold that triggers the real estate transfer tax (RETT) in share deal transactions. In addition, some of the federal states in the upper house of Parliament launched their own initiative to ask the federal government to consider amending the RETT code based on future recommendations of the joint working group.
Under current rules, RETT is triggered on direct transfers of real estate and where 95% or more of the shares in a German real estate-owning company are directly or indirectly transferred to a new owner, or where 95% or more of such shares are directly or indirectly combined for the first time in the hands of a new shareholder. The same should apply if there is a 95% or greater change either directly or indirectly of the partners in a partnership.
The joint task force is considering three different models to lower the 95% threshold:
- The first model consists of a straightforward reduction of the threshold to 75% or 50% of the shares in a real estate-owning entity that are directly or indirectly transferred or combined at the level of a new shareholder. The RETT would be assessed on the full amount of the special tax value. No further RETT would be triggered upon a subsequent increase of the shareholding percentage.
- The second model would be based on a more graduated approach: if at least 50% of the shares are directly or indirectly transferred, RETT would be triggered on a pro rata basis. If there is a direct or indirect transfer of 75% or more of the shares, RETT would be triggered on the full amount. If an existing shareholding is increased and this increase triggers RETT, the RETT paid in previous transactions would be credited.
- Under the third model, RETT generally would be triggered without a threshold (or a low 1% threshold) on a pro rata basis in the event of a share transfer.
Of the three models under discussion, the first appears to be the easiest to implement. The third model seems to be the most complex and there are concerns regarding the enforcement of this rule.
A lower RETT threshold could significantly affect taxpayers that own German real estate in their worldwide group. Both existing structures and ongoing transactions should be examined. Together with the uncertainty about the future of the intragroup restructuring exception in the RETT code (which currently is before the Court of Justice of the European Union regarding its compatibility with EU state aid rules, pending case C-374/17), it could create new hurdles for internal group restructurings of multinational groups.
It is unclear whether and when a proposal for a reduced RETT threshold will be introduced into the legislative process, also considering the outcome of the federal elections held on September 24, which made forming a new federal government more complex than usual.
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