Discussion draft on German RETT changes submitted: PwC

Discussion draft on German RETT changes submitted

July 2023

In brief

The Federal Ministry of Finance has submitted a discussion draft of a law amending the Real Estate Transfer Tax Act (RETTA) to the federal states for initial comments. At this date, it is uncertain whether the circulated draft will lead to a change in the German real estate transfer tax (RETT) regime.

If this draft is enacted, the German RETT regime would be substantially amended. For multinational companies with German real estate assets, RETT neutral reorganizations within a group would be possible. To prevent RETT neutral share deal transactions between third parties, the concept of a ‘group of acquirers’ acting together and the concept of ’serving interest’ are being introduced. The proposal is intended to become effective January 1, 2024.

New tax rules

The draft RETT regime would provide for a single rule to tax share deals, namely Section 1a RETT-draft, which is applicable to the acquisition of shares in corporations as well as partnerships. RETT would be triggered if a person (or a group of persons acting together) unifies all relevant shares in a real estate owning entity, either directly or indirectly via intermediate entities. This new rule therefore generally follows the concept of the present unification rules (Sections 1(3) to (3a) RETTA) with the amendments described below.

The present transfer rule -transfer of 90% of the shares within 10 years, according to Sections 1(2a), (2b) RETTA - as well as the present unification rules (Sections 1(3), (3a) RETTA) would be replaced in full by Section 1a RETTA-draft. As a result, the monitoring period (currently 10 years) and the fixed participation hurdles (currently 90%) would no longer apply under the draft regime.

‘Acquirer group’ concept, ‘serving interest’ concept and intra-group exception

The presently applicable fixed participation hurdles of 90% would be replaced with the concept of an ‘acquirer group’ acting in concert as well as ‘serving interest’. The acquisition of all relevant shares by an ’acquirer group’ is subject to RETT if the group (at least two (legal) persons) acts jointly in acquiring the relevant shares. The definition of ‘acting together’ appears rather broad and could leave substantial room for interpretation. However, acting together by two or more persons as ‘acquirer group’ is generally assumed where the share transfers to the members of the group are linked, either factually or from a timing perspective.

When determining the relevant number of shares that are held by a person (or ‘acquirer group’) in the target company, shares held by a third party (being no member of the ‘acquirer group’) on behalf of or for the benefit of the acquirer (‘serving interest’) would be disregarded. Due to this concept, RETT also could be triggered if, for example, only 85% of the shares in the target are acquired, provided the remaining 15% fall under the definition of ‘serving interest.’

According to the newly drafted Section 5(1) RETTA-draft (successor regulation to Section 6a RETTA), reorganizations could be exempt from tax if the ultimate owner of the real estate asset does not change because of the reorganization. In practice, transfers within a wholly owned group should be able to benefit from this proposed exemption.

Observations:

The draft proposal comprises a substantial change and simplification to the present RETT regime in Germany. Enactment of the draft proposal could provide substantial relief to taxpayers and offer more flexibility to mitigate undesired multiple RETT charges in corporate groups. At the same time, the new rules also anticipate providing for RETT taxation if different taxpayers acquire shares in a real estate owning entity as an ‘acquirer group’ acting in concert.

The RETT amendment process is still at an early stage, and the federal states will need to agree to the proposed concept. Especially since the draft proposal no longer relies on strict hurdles or monitoring periods for share deals, it is not yet clear how the federal states may view the new concepts (i.e., ‘acting together’ and ’serving interest’) as applicable in practice. Multinational companies with German real estate assets should monitor the legislative process.