The German Federal Ministry of Finance has published a discussion draft regarding the amendment of the real estate transfer tax ("discussion draft"), which is especially important with respect to share deals. One of the main reasons for the draft regulations is the abandonment of "joint ownership" ("Gesamthandsgemeinschaft") coming into application with the modernization act on the law of partnerships ("MoPeG") on January 1, 2024. The goal of the amendment is to avoid taxation gaps on the one hand and inappropriate tax burdens on the other hand. Therefore, fixed participation limits and time limits in a share deal situation shall be abolished. The new rules should come into force on January 1, 2024.

I. Changes at the level of partnerships

As the MoPeG will abandon the system of "joint ownership," for tax purposes real estate properties won't be attributable to the partners any longer, but to the partnership itself. As the current Real-Estate-Transfer-Tax-Act ("RETT-Act") contains several regulations based on the concept of such "joint ownership," the RETT-Act is clearly affected by these changes. The German Federal Ministry of Finance plans to eliminate differences between partnerships and corporations and therefore will introduce new exemption rules for partnerships and corporations.

II. Changes for share acquisitions

Under the current version of the RETT-Act, the acquisition or the change of shareholding ("share transfer") of at least 90% of the shares of a real estate owning company is subject to real estate transfer tax (RETT). According to the discussion draft, only the share transfer of 100% of the shares of a real estate owning company will lead to RETT. However, for cases in which a person acquires less than 100% of the shares, the discussion draft introduces "acquisition groups" and persons with a "serving interest" to ensure taxation. In these cases, a share transfer of less than 100% of the shares is treated as acquisition of all shares, leading to a real estate transfer tax.

III. Taxation of "acquisition groups"

In the case of a share transfer of 100% by at least two persons collectively with the goal to avoid RETT, these persons are considered to be an "acquisition group" ("Erwerbergruppe"). Further, an "acquisition group" in the meaning of the discussion draft is assumed in the case of a temporal and factual context between the individual acquisitions. In the aforementioned cases, acquisition groups are treated as one person, acquiring 100% of the shares and therefore being subject to real estate transfer tax. All members of an "acquisition group" are joint debtors to RETT. In cases in which the joint debtors fail to pay RETT, the real estate owning company is liable to such tax. Members of an "acquisition group" can be individuals as well as legal entities.

IV. Taxation of persons with "serving interests"

In addition, in the case of a share transfer of less than 100%, such acquisition is RETT-taxable if another shareholder keeps the remaining shares to "serve the interest" of the acquiring party. In this case, the share transfer will be treated like an acquisition of 100% of the shares, therefore leading to taxation. Usually that would be the case when the acquiring party has the majority of the shares and the shareholder of the remaining shares is limited in his company rights.

In group reorganization cases, all forms of potential acquisition shall be exempted from RETT, as long as the controlling influence on the real estate remains unchanged in the hands of the same controlling entity.

V. Outlook

The discussion draft provides major changes with respect to the taxation of the transfer of shares in real-estate-owning entities. Due to the abolishment of the joint ownership concept with the MoPeG, an amendment was compelling. As it is at early stage in the legislation process, this draft is likely to see further changes in the future. It is planned that the legislative process will be completed this year to ensure a commencement of the final rules in accordance with MoPeG on January 1, 2024. At this point, several questions remain open, like the treatment of past acquisitions, if, after lapse of the 10-year period, further share transfers take place. Right now, on the basis of the current draft, all changes in shareholdings (e.g., 10.1% remaining shares will be transferred) should lead to a full RETT taxation. It is advisable to review carefully any changes in shareholding of less than 100% in real-estate-owning entities within the last 10 years and to decide if taking any action before January 1, 2024 would be advisable.

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Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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