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New developments in German real estate
By Mathias Schönhaus
German taxes still create significant hurdles to investing in German real estate. By far the most significant tax exposure is the German real estate transfer tax (RETT), levied at a tax rate in the range of 3.5% to 6.5% on the purchase price or the value of the property in case of an asset deal. Investors have therefore been creative in setting up RETT optimized transactions by using share deals instead of asset deals.
In order to avoid RETT, current law requires that at no point in time 95% or more of shares are held by one person or, in case of a partnership, not more than 95% or more of the interests are transferred to a new shareholder within a period of five years. Tax driven structures do not exceed these thresholds, i.e., transfer of shares 94.9% / 5.1% to independent parties, while observing the five year period for partnerships.
German politicians discovered the impact and started to call these structures – albeit legally allowed –abusive. On 9 August 2019, the German government published a draft proposal which aims to set high barriers against these structures. The proposal includes lowering the threshold to 90%, extending the five years to 10 years, and introducing a new rule pursuant to which transfers of a corporation within 10 years to new shareholders triggers RETT. The new law would come into effect by 1 January 2020, but contains many transitory rules having significant impact on existing structures. Consequently, an investor cannot exit fully from an investment, but will need to stay invested with 10.1% for a consecutive period of 10 years (and any transfer of 90% or more of the shares in an investor vehicle will also be considered as a transfer of the shares held by such investor).
Project developers and investors are seeking innovative structures for the future, e.g., joint ventures in which the project developer stays invested for 10 years with 10.1%. Additionally, any current structures need to be diligently reviewed with regard to the impact of the new rules, including any transitory rules, considering the previously agreed or intended exit strategy.
It is still unclear if and to what extent these plans will be implemented. However, investors should be aware of the impact on current structures and review appropriate structures for future investment.
