New RETT rules for share deals agreed

On 21 June 2018 the Ministers of Finance of the Federal States agreed on new Real Estate Transfer Tax (RETT) rules for share deals.

According to official press releases, a fundamental reform of the RETT which had previously been discussed was not agreed. Rather the agreement reached consists of new RETT rules for share deals with a lower threshold, longer holding periods and an alignment of the rules applicable to corporations to the rules that already apply to partnerships.

No draft wording of the legislation implementing the new RETT rules is yet in circulation. Therefore, it is not yet known when these rules shall apply for the first time and to what extent they may apply with retrospective effect.

Current rules

The current RETT rules for share deals operate differently for partnerships on the one hand and corporations on the other hand:

• Rules for partnerships: As far as partnerships holding German real estate (e.g., a German KG) are concerned, the direct or indirect transfer of at least 95% of their interests to new partners within a five year holding period is subject to RETT.
• Rules for corporations: In contrast, in case German real estate is held by corporations (e.g., a German GmbH or a Luxemburg S.à r.l.), only the direct or indirect “unification” of at least 95% of the shares in the hand of an acquirer or a related group or the transfer of an already “unified” participation of at least 95% triggers RETT.

To specifically counteract RETT-blocker structures (“94/6”-structures), the legislator already introduced a rule in 2013 pursuant to which the holding of an at least 95% “economic” participation is taxable for RETT purposes. This rule applies in relation to partnerships and corporations identically.

Agreed new rules

The agreement between the Ministers of Finance of the Federal States on the new RETT rules for share deals can be summarized as follows:

• Lowering of thresholds: The threshold for triggering RETT will be lowered from 95% to 90%. This means that RETT can only be avoided if less than 90 % of the shares or interests in corporations or partnerships are transferred. As a consequence, sellers must keep more than 10 % of the shares or interest in order to avoid RETT.
• Alignment of rules: The rules applicable to corporations will be aligned to the rules that currently apply to partnerships. This means that in relation to shares in corporations not only their “unification” but also the transfer of at least 90 % (due to the lowered threshold) of their shares to new shareholders will be subject to RETT. Consequently, it will no longer be possible to transfer 100 % of the shares of a real estate holding corporation (e.g., a German GmbH) to two unrelated investors without triggering RETT.
• Extension of holding periods: The holding period for the seller for his minority stake or interest of more than 10 % will be extended from 5 to 10 years. As a result, shares or interests in corporations or partnerships may only be fully acquired after the extended period of 10 years has lapsed.

The new RETT rules for share deals may also provide for consequential other amendments to the RETT act. Since there is no draft wording of the legislation yet, the implications to specific structures are difficult to predict at present.

Retrospective application possible

The officially available information on the agreed new RETT rules for share deals is silent on when these rules shall apply for the first time. It is conceivable that the rules could be introduced with retrospective effect. In a worst case scenario already transactions entered into as from 21 June 2018 might trigger RETT pursuant to the future new rules.

We believe that such an extensive retrospective application might contradict constitutional principles. However, in recent years the case law of the Federal Constitutionals Court has been less stringent in declaring tax laws anti-constitutional due to their retrospective application. Against this backdrop, we advise to thoroughly review transactions which have not been signed and closed prior to 21 June 2018, in particular if high volumes of RETT are at stake.

Further developments

We will keep you posted on any further developments and other tax related topics.