On April 21, 2021, the Bundestag passed a new law amending the RETT Act. The new rules will lead to a considerable tightening of the taxation of share transactions when real estate in Germany is affected.
The most important changes include:
- Lowering the participation threshold (from 95% to 90%);
- Extension of the minimum holding period (from 5 to 10 years; in certain cases even to 15 years);
- Taxation on the direct and indirect transfer of at least 90% of the shares in companies that own real estate within 10 years (does not apply to listed companies).
The changes will take effect on July 1, 2021.
The final passage of the new law is expected in May 2021, and it is very unlikely that German lawmakers will make any significant last-minute changes.
This customer notification provides an overview of the changes and their possible effects. It is relevant for all companies and partnerships worldwide that own real estate in Germany and are planning a change of ownership, as well as for all investors worldwide who want to acquire German real estate as part of a stock deal. In addition, the changes are also relevant for all those transactions that were agreed before July 1, 2021, but will be executed after that date.
BACKGROUND TO THE GERMAN RETT
In Germany, a direct transfer (“asset deal”) of real estate in Germany is subject to RETT. The tax rate depends on the respective federal state and is between 3.5 and 6.5% of the purchase price.
Under certain circumstances, RETT can also be realized in a stock deal. In the current legal environment, RETT is triggered in a stock transaction if:
- Within five years, 95% of the shares in a partnership that owns real estate in Germany will be transferred directly or indirectly to new partners (“Taxation on the Transfer of Shares”); or
- A person or group of related persons directly or indirectly acquires shares in a company (partnership or company) that owns real estate in Germany, with the result that this person or group of people holds at least 95% of the shares in this company (“Taxation of the Association of Shares”).
It is currently possible to reduce the RETT risk in equity transactions by establishing certain structures that do not exceed the participation threshold and holding period mentioned above.
For example, it is common for
- Only 94.9% of the shares in a partnership will be transferred within the five-year holding period. After five years, the seller transfers the remaining 5.1% without triggering RETT. or
- The transfer of shares in a real estate company will be split with the main investor acquiring 94.9% of the shares and an unaffiliated co-investor acquiring the remaining 5.1% of the shares without redeeming RETT.
With the changes that have now been adopted, the previously established structures to reduce RETT’s commitment to future equity transactions will no longer work. This must be taken into account when transferring shares or shares in a company that owns German real estate.
OVERVIEW OF THE CHANGES
With effect from July 1, 2021, the above participation threshold will be reduced to 90% and the minimum holding period will be extended to 10 years, in certain cases even to 15 years. In addition, the rules for taxing the transfer of shares apply not only to partnerships, but also to corporations.
As a result, after June 30, 2021:
- A direct or indirect transfer of at least 90% of the shares in a real estate company within 10 years to new partners or shareholders (regardless of whether the company is a company or a partnership) or
- Transactions that combine at least 90% of the shares or shares in a company with one person or a group of related persons
will trigger RIGHT.
Exceptions apply to the taxation of the transfer of shares in companies that are listed on a stock exchange in the European Union, in the European Economic Area or on a stock exchange declared to be equivalent by the European Commission. Special rules also apply to transfers within a tax group where the previous participation threshold and the holding period remain in force.
APPLICATION OF NEW RETT RULES
The new rules will come into force on July 1, 2021.
The rules also apply to transactions where the signature has already taken place but the closing and transfer of real estate ownership will not be completed before July 1, 2021.
In addition, the previous law continues to apply in all cases that are not covered by the new law. Shareholders who owned shares of at least 90% but less than 95% on June 30, 2021, will continue to be subject to the old participation threshold of 95% even after the new regulation came into force. It is therefore not possible to benefit from the new regulation by increasing the 92% of the shares held on June 30, 2021 to 100% after July 1, 2021.
However, for the new regulation for corporations for taxing the transfer of shares, shares transferred before July 1, 2021 are not included in the 90% threshold.
POSSIBLE EFFECTS OF NEW RETT RULES
The new German RETT rules will most likely lead to a significantly longer holding period for real estate company changes of ownership. With effect from July 1, 2021, only a maximum of 89.9% of the shares or shares can be transferred within 10 years of the purchase without RETT being incurred. In certain cases of partnerships, even 15 years must have passed.
Structures to reduce the RETT in equity trades that were built and used in the past will therefore be significantly less attractive in the future.
In addition, each share price must be carefully checked if the German RETT is unexpectedly triggered by the transfer of shares. For previous and current transactions, it must be checked whether the new regulations already apply or whether the holding periods still need to be monitored in accordance with the old regulations.