The 2021 reform of the German real estate transfer tax law (Grunderwerbsteuergesetz or GrEStG) included, among other things, three important changes.
- Under the revised version partnership rule to §1(2a) GrEStG, the transfer of at least 90% of the interests in a partnership holding real estate located in Germany within ten years to (any number of) new partners triggers the RETT. Before the reform, the holding period and the holding limit were respectively five years and 95%.
- A new §1(2b) GrEStG has been added. This New Society Rule has been modeled on the partnership rule and provides that a change in the shareholding of at least 90% of the capital of a real estate holding company over a period of ten years will trigger the RETT, even if no shareholder controls the society.
- Due to concerns that listed companies may be subject to RETT whenever their shareholding changes by at least 90%, a new §1(2c) GrEStG has introduced an exemption for listed companies (the Exemption for listed companies).
For more details on these changes, see this previous post. The new rules generally apply from June 30, 2021, subject to certain transitional provisions. This article examines the guidance issued by the German tax authorities on the new rules.
Partnership Rule and New Company Rule Decrees
In mid-2022, the German state tax authorities issued a long-awaited decree on the New Corporation Rule and revised the existing decree on the Partnership Rule. As expected, the structure of the New Corporation Rule decree is based on the already well-known Partnership Rule decree. Both decrees relate to similar points and essentially provide for the following:
- For the purposes of the RETT, real estate is part of the assets of an entity if it is attributable to that entity under the GrEStG. This is the case if, at the time the event occurs, the property is attributable to the entity on the basis of an acquisition falling within the scope of §1(1), (2a), ( 2b), (3) or (3a) GrEStG. This approach carries the risk of multiple taxation if the real estate is attributable not to one, but to several entities.
- In the event of a shortening of the chain of ownership, the status of former shareholder is only retained in the event of an indirect shortening of the chain. In the event of a direct transfer of an interest or shares in the partnership or the real estate holding company, the shortening entails a change of partner or shareholder under the rule of partnership or the new rule of society.
- The decrees prevent the application of the “change of legal form” model previously used. The opinion of the tax administration is that, when an entity reorganizes to change its legal form, all changes of relevant partners or shareholders before the reorganization constitute changes of partners or shareholders to be recorded after the reorganization whereas before the reform of the RETT, the count was reduced to zero by a change of legal form.
- According to the tax authorities, the Partnership Rule and the New Corporation Rule rank pari passu and neither has precedence over the other. This interpretation could have detrimental effects, in particular, in the event of simultaneous application of the two rules which could lead to multiple taxation.
- The signing and closing of a transaction are two separate events under the RETT law. This is particularly problematic with regard to the so-called unification rule in §1(3) GrEStG (unification of at least 90% of the shares of an entity holding real estate in one hand) and its relationship with the rule of partnership and the new Corporations Rule since the taxation dates diverge. The unification rule applies at the time of signing, while the limited partnership rule and the new company rule apply from closing, i.e. upon transfer of the stake or shares concerned. However, according to the executive orders, the competent tax office may refrain from assessing the RETT according to the unification rule if a taxable event under the partnership rule or the new corporation rule (i.e. i.e. closing) occurs within one year. In all cases, an assessment under the Unification Rule will be subject to review and will be revoked or amended once a notice under the Partnership Rule or New Partnership Rule can be issued.
- Another significant change is the renunciation by the tax authorities of the so-called perpetuity clause, long decried in the literature. Thus, in the case of an indirect change of shareholders of a company which in turn holds shares of a company or a real estate holding company, the usual period of ten years applies.
The revised decree on the partnership rule must be applied in all open cases. For transactions prior to July 1, 2021 or those falling under the transitional provisions of Article 23(19) and (20) GrEStG, the decree applies provided that the (old) threshold of 95% and a period of five years are used.
Decree on the exemption of listed companies
Recently, the tax authorities of the German states issued another decree on the exemption of listed companies. According to this decree, the scope of the exemption for listed companies is narrow and obliges all listed companies holding real estate located in Germany to comprehensively monitor the movements of their shares. Initial public offerings, share issues resulting from capital increases and securities lending, borrowing and repurchase transactions are not transfers of shares covered by the exemption for listed companies. The decree does not deal with indirect transfers or transfers of shareholders in the event of physical replication of ETFs.
Concerning the obligation of “listing”, the decree specifies that:
- The exemption requires a listing on a stock exchange authorized under German securities trading law (or certain equivalent EU/EEA/other stock exchanges) (organized markets) and only applies to transactions which are concluded there.
- Outside the EU/EEA, only regulated markets in the USA, Australia and Hong Kong are accepted as equivalent organized markets. This means that transactions concluded, for example, on the SIX Swiss Exchange or the London Stock Exchange would not fall under the exemption for listed companies.
- In Germany, the regulated market of a stock exchange is referred to as an organized market. But multilateral trading systems like sidewalk trading (Freiverkehr) and over-the-counter transactions do not constitute an organized market.
- Therefore, shares of, for example, UK or Swiss joint-stock companies which are listed on a foreign market, but in Germany (or in an EU/EEA state or equivalent country) only on the open market, are therefore excluded from the application of the listed company exemption.
Fortunately, the decree specifies that no notification obligation is present if, following the application of the exemption for listed companies, the required threshold of 90% is not reached for the purposes of the rule of partnership or the new company rule.
Outlook
Despite the publication of the three decrees, the RETT remains a complex area of German tax law with many open questions. Therefore, it is to be hoped that the German tax authorities will issue new guidelines to clarify matters. However, rumor has it that the tax authorities are instead working on a complete overhaul of the German RETT law, i.e. the reloaded RETT reform.
Rumor has it that the tax authorities are instead working on a complete overhaul of the German RETT law, i.e. the reloaded RETT reform.
