Last week, the German Federal Ministry of Finance (BMF) published the draft annual tax bill 2019 [link in German], which, amongst others, contains the anticipated amendments to the real estate transfer tax act (RETT Act) for so-called share deals that have been intensively discussed for many months.
As expected, the relevant provisions in the draft bill tightening share deal parameters are the following:
1. lowering of the threshold for transfers of partnership interest and consolidation of shares in the hands of one shareholder triggering real estate transfer tax (RETT) from 95% to 90%;
2. extension of the holding periods from five to 10 years or 15 years; and
3. introduction of a new provision under which the transfer of at least 90% of shares in corporations owning German real estate to new shareholders within a period of 10 years triggers RETT.
The good news is that, contrary to widespread fears, according to the draft bill these changes will not enter into force retroactively. However, the transitional rules provided in the draft bill are complex. The most relevant rules can be summarized as follows:
• The new provisions will apply to transactions carried out after 31 December 2019. Accordingly, all transactions completed in 2019 will fall under the current regime.
• A further transitional rule is provided for the application of the new § 1 (2b) RETT Act (transfer of at least 90% of shares in corporations): This new provision will not apply if the purchase agreement is entered into within one year prior to a certain cut-off date, and the shares are transferred to the purchaser within one year after such cut-off date. If the purchase agreement has been entered into more than one year prior to such cut-off date, the transitional rule would not apply, and the transfer of the shares would be subject to RETT in accordance with the new regime. The cut-off date for this and other transitional rules is the date on which the draft will be submitted to the German Bundestag.
• The draft provides a comparable transitional rule for the transfer of at least 90% of partnership interests to new partners within a 10-year period pursuant to § 1 (2a) RETT Act. The new provision does not apply if the purchase agreement is entered into within one year prior to the cut-off date, and the transfer of the interests takes place within one year after such cut-off date.
• Partners who qualify as so-called "old partners" as of 31 December 2019 remain old partners. This is important for partners who have been partners for more than five but less than 10 years by the end of this year with respect to the calculation of the threshold in § 1 (2a) RETT Act and the holding periods required for certain benefits applicable to partnerships.
• The current regime’s 95% threshold for the transfer of partnership interests and consolidation of shares in the hands of one shareholder remains applicable to structures in which the 90% threshold has already been exceeded. Therefore, if a shareholder currently holds 94.9% of a company’s shares, it cannot increase its shareholding to 95% or more without triggering RETT, even though the new 90% threshold has already been exceeded.
The BMF has invited various associations to comment on the draft bill by 5 June 2019. The draft bill will likely not be submitted to the legislative process before the comments of the associations have been evaluated. Please note that the proposed new regime and the transitional rules may still be subject to changes in the further process.
Conclusion:
While the draft bill fails to provide companies with the certainty on final amendments to the real estate transfer tax act, the transitional rules contain important indications for the implementation of envisaged and ongoing transactions. Greenberg Traurig would be pleased to advise you on the possible implications of the proposed amendments for existing structures as well as planned projects.