Real estate transfer tax (“RETT”) reform likely to be implemented on short notice

The German RETT reform is gaining momentum and an updated draft bill is contemplated to be voted on by the German parliament as early as mid-April. While a draft bill has not yet been published, with a few exceptions, the new rules are expected to be largely similar to a previous draft published in 2019. But what implications will this have on the pricing of real estate transactions in Germany?

“The proposed new German RETT rules have the potential to fundamentally change the pricing of real estate transactions in Germany as it would become much more difficult to not incur RETT on Share Deal. Many real estate investors will therefore probably try to close Share Deal transactions before the new rules come into effect on 1 July 2021”, comments Sven Wortberg, Frankfurt based Real Estate partner.

“Market participants may also consider moving to investments via real estate funds, bearing in mind that the transfer of fund units should still be possible without incurring RETT after 1 July 2021”, comments Steffen Hörner, Frankfurt tax partner.

What are the main features of the new German RETT rules?

Relevant thresholds to be reduced from 95% to 90%

Generally speaking, the relevant thresholds for German RETT being charged in respect of so-called “Share Deals”, i.e. the sale and transfer of participations in real estate holding partnerships or corporate entities ( “Propcos”), are likely to be reduced from currently 95% to 90%. This is likely to apply to all provisions under which German RETT is currently charged in respect of Share Deals on the basis of a 95% threshold.

Extension of holding periods

The current RETT regime provides for certain holding periods, after the lapse of which participations in Propcos in the form of partnerships can be disposed of without incurring RETT. Such holding periods are likely to be extended from currently five to ten years. Moreover, certain other holding periods which apply to certain RETT exemptions (in particular in situations where German real estate is transferred to and from partnerships) are also likely to be extended with certain holding periods being extend even to 15 years.

Partnership rule to be applied also to corporate entities

A specific rule that currently only applies to Propcos in the form of partnerships is set to be applied also to Propcos in the form of corporate entities. As a result, RETT would become chargeable at Propco level if 90% or more of the shares of such Propco are transferred to one or several new shareholders within a period of ten years (with share transfers prior to the new rules coming into force likely not being taken into account).

This is a fundamental change to the current RETT rules, and certainly the main feature of the RETT reform, as it means that current standard structures under which sellers would have sold 94.9% of the relevant Propco in the form of a corporate entity to one, and ap-prox. 5.1% to another buyer without observing any holding period will no longer be possible without RETT becoming chargeable.

Exemption for listed companies

Applying that partnership rule also to corporate entities without stipulating any exceptions could result in RETT becoming chargeable with respect to listed companies and their sub-sidiaries if only the free-float of their shares were large enough to allow for 90% or more of the shares to change hands within a ten year period. In order to avoid this result, the new regime provides for an exemption that applies to companies with shares listed and traded on stock exchanges authorised under the German Securities Trading Act (or certain equivalent EU/EEA/third party stock exchanges) where the share transfers takes place via such stock exchange.

When will the new rules likely come into effect?

The new rules are expected to enter into force as of 1 July 2021.

Transfers of participations in Propcos where the sale and purchase agreement has been entered into prior to such date, but the closing only occurs thereafter, are likely to be sub-ject by the new rules, i.e. RETT is likely to be incurred. 

In addition, the 95% threshold is likely to continue to apply in respect of cases, where the taxable entity had already acquired more than 90%, but less than 95% of a Propco before 1 July 2021. This is supposed to prevent transactions where a shareholder increased its participation from over 90% to 100% from escaping RETT.