Real estate transfer tax and more - current legislative projects will significantly impact the real estate industry

Published Date
Jul 21, 2023
Note: This is a condensed article written for an English-speaking audience. We have also published a full, German language article. Recently, the German Federal Ministry of Finance has launched several draft bills that could have significant effects for the real estate industry. This includes both transaction-related taxes (real estate transfer tax (RETT), taxation of capital gains) as well as on-going taxation (especially with regard to the deductibility of interest expenses). Some of the changes specifically relate to investment funds, but the majority of the changes has an impact on the entire industry, regardless of the holding structure or asset class. All of the contemplated changes described are to apply from 2024 onwards (unless otherwise stated).

Real Estate Transfer Tax Amendment Act (Grunderwerbsteuer-Novellierungsgesetz)

The most fundamental changes concern RETT as – quite surprisingly – the German Federal Ministry of Finance has published a discussion draft for an elementary RETT reform. The proposals would have a strong impact in particular on share and unit deals.

Share Deals - Replacement of current regime by introduction of a single “unification rule”

Currently, the general concept to encounter undesired "share deals” comprises a complex system of different “transfer rules” and “unification rules” (partly depending on the relevant legal form of the asset holding entity).

In the future, only the unification of 100% of the shares in a real estate company in the hands of a purchaser or a purchaser group (Erwerbergruppe) shall trigger RETT. Different persons shall thereby be considered to constitute a “purchaser group” if they have coordinated their acquisitions with each other. This includes a joint planning or the intention to achieve joint control over the real estate company. Moreover, it will already be considered a sufficient coordination if the acquisitions are merely related either in time or in fact (zeitlicher oder sachlicher Zusammenhang).

Example: Investor A and investor B each acquire 50% of G-GmbH, which holds a German real estate asset, from seller C. The acquisitions are concluded under a joint notarial deed. Under current rules, RETT would be triggered pursuant to § 1 para. 2b RETT Act (transfer of at least 90% of the shares to new shareholders). In future, in this case there would be a 100% unification of the shares in the hands of the purchaser group formed between A and B. The acquisition would therefore also be subject to RETT.

It is completely open when such a “relation in time or in fact” actually exists in less clear cases than the above example. The tax authorities apparently want to cover all circumstances of any kind that relate the acquisitions to one another. From the tax payer's point of view, however, this is rather unsatisfactory as already for the time component it is unclear whether weeks, months or even the 10-year period existing under current RETT rules are considered relevant.

In addition, in order to encounter undesired structures through the involvement of a minority shareholder with residual interests, a concept of "controlled interest" (dienendes Interesse) is introduced. Any shares held within such concept of “controlled interest” are not taken into account for the determination of the 100% unification quota.

Example: Investor A acquires 98% of G-GmbH, which holds a German real estate asset, from seller C, who continues to hold the remaining 2% of the shares. If C's shareholding is considered to be a "controlled interest" of A, the shares held by C would not be taken into account for purposes of the new unification rule, so that A would have unified 100% of all shares relevant for RETT purposes and RETT would be triggered.

Here, too, the discussion draft provides for rather far-reaching examples when  such “controlled interest” exists. It shall, e.g., be sufficient if the fair market value of the shares or interests held by the respective “controlled” person is lower than the amount of RETT triggered in case of a 100% unification. In particular in case the real estate is leveraged, this may cover quite substantial shareholdings and would, moreover, depend on the RETT rate of the German Federal State in which the real estate is located. Also, mere restrictions in the shareholder rights (e.g. in case of preferred stock), the agreement of a fixed or minimum profit entitlement or the mere possibility of the acquirer or at least one member of “purchaser group” to exercise any significant influence on the “controlled” person would be harmful. This is apparently guided by structures in which the minority shareholder was economically set up similar to a service provider of the majority shareholder. The current discussion draft, however, has a considerably excessive effect and appears hardly applicable in practice.

Counter-measures against so-called “unit deals”

Currently, transfer of units in contractual investment funds (such as a German Sondervermögen) are not considered to result in a transfer for RETT purposes (so called “unit deal”). The reason for this is that legal ownership of the real estate assets of a Sondervermögen is typically held by the management company and such legal ownership has in the past been considered as decisive also for RETT purposes. Depending on the relevant legal qualification of the investment fund in its country of establishment, a similar treatment may also apply to comparable foreign investment funds.

The current discussion draft now foresees that such contractual investment funds – although not having a legal personality – qualify as “real estate companies”. This effectively results in a duplication of the real estate asset for RETT purposes: it is attributed both to the management company (as legal owner) as well as to the contractual investment fund. Thus, transfers of shares in investment funds and comparable foreign fund assets may trigger real estate transfer tax in the future even if the ownership structure of the management company does not change.

Please note, however, that the classification of Luxembourg FCPs still remains questionable. Due to the special circumstances of Luxembourg company law, it is unclear whether an FCP is comparable to a relevant German Sondervermögen for RETT purposes. In practice, a conservative approach with allocation to both the respective management company and the FCP would be advisable.

Finally, it will also be clarified that in case of  umbrella funds, the real estate will (also) be attributed to the relevant sub-fund rather than only to the umbrella fund itself.

Group exemptions

Under current RETT rules, the group exemption clause is only applicable subject to several strict requirements so that such group exemption did not play a very significant role for structuring purposes in the past.

Under the discussion draft, the group exemption clause will be significantly extended. Provided that the corresponding real estate is attributable to a certain person, any restructuring that does not change such attribution may be implemented without triggering RETT (irrespective, e.g., of certain holding periods). Please note, that a unification in the hands of a mere “purchaser group” is not sufficient.

In addition, also the current RETT exemptions for direct transfers of real estate to or from a partner to a partnership and vice versa are in principle retained and also extended to cover corporations. However, the drafting of the corresponding provisions raises several questions so that we expect that there will still be changes in the course of the legislative proceeding.

Other relevant changes

Other relevant provisions of the draft proposal include:

  • The possibility for the German Federal States to introduce a tax exemption for the acquisition of owner-occupied residential property by individuals;
  • The introduction of a joint and several liability of the asset holding company and all companies contributing to the “100% unification” for the RETT being triggered. In addition, such RETT can be enforced into the real estate asset. Therefore, in future asset deal acquisitions, the history of past changes in the corporate structure of the seller must be reviewed as part of the due diligence process in order to exclude that RETT was triggered in the past which can be enforced into the real estate asset; and
  • The onerous, recently introduced (and much debated) concept of double notification at signing and closing shall be abandoned.

Entry into force / likelihood of implementation

The new regulations are intended to apply as from 2024.

Please note that the draft does not foresee any express provisions on the issue whether existing structures with minority shareholders can be dissolved from 2024 onwards without incurring RETT. This will therefore require an analysis on a case-by-case basis.

The overall chances of this RETT reform being implemented can at best be described as "uncertain" due to the German Federal States having to consent to it. Given the back and forth on the last RETT reform, a smooth process is all but certain but it is currently expected that at least some changes will be concluded still this year.

Significant other initiatives

Almost in parallel to the discussion draft for the RETT reform, other significant draft bills have been published. We would like to make you aware of some selected proposals which may have a substantial impact on the real estate industry.

Interest barrier rules (Zinsschranke)

The tax deductibility of interest is of substantial importance for many real estate holding entities. In particular the EUR 3m threshold (unrestricted deductibility of net interest expenses below EUR 3m p.a.) plays an important role in this regard. In 50/50 joint venture as well as in securitization structures, also the "stand-alone clause" is relevant.

It is now intended to abolish all existing exemptions to the interest barrier rules except for the EUR 3m threshold. The EUR 3m threshold (Freigrenze)  will also become an allowance (Freibetrag). The interest barrier would then only affect net interest expenses to the extent they exceed EUR 3m.

On the flip side of the coin, however, it is contemplated that such EUR 3m allowance can only be applied once for all “similar businesses” (gleichartige Betriebe). This may result in a situation where a real estate group comprising multiple asset holding entities (with, as the case may be, real estate of different asset classes) can only make use of the allowance once. It does not need much explanation that in many cases this could lead to considerable additional tax burdens.

Interest rate ceiling (Zinshöhenschranke)

In addition, a new concept of an interest rate ceiling is introduced. This is intended to limit the deductible interest in relation to related parties - unless substance or a higher arm's length interest rate for both the lender and the group parent company can be demonstrated - to an amount of 2% above the respective base interest rate. Based on the current base interest rate of 3.12% (as of 1 July 2023), this would result in an interest ceiling of 5.12%. 

It is currently unclear whether this may also be understood as a "safe haven" at the same time or whether the arm's length test must also be fulfilled for interest rates falling short of the interest rate ceiling. However, we would expect that the tax authorities take that view that further restrictions on interest deductions remain unaffected.

Taxation of capital gains from share deals by real estate funds

Under current rules, capital gains from the disposal of shares in (German or non-German) corporations holding German real estate are not subject to German income taxation in the hands of a (German or non-German) investment fund. 

Based on the fact that – by contrast – an asset deal disposal of the German real estate is subject to German taxation, the German tax authorities seemingly conclude that a share deal effectively is a circumvention of an asset deal and therefore intend to subject share deals to full German income taxation. 

The capital gain would therefore de facto be taxed like an asset deal, without, however, any step-up in the tax base of the real estate asset being available. Therefore, when the asset is sold by the relevant asset holding corporation, the disposal is again subject to full German income taxation. This would lead to a considerable discrimination of fund structures in comparison to corporate holding structures where the corresponding share deal disposal would still not attract German income taxation. It therefore seems questionable whether this is upheld in the course of the legislative process.

Reduction of tax rate that triggers German CFC rules

The application of the German CFC rules are an important issue in particular for German institutional investors investing into real estate structures (including German or non-German investment fund structures). The German CFC rules currently require, e.g., that passive income generated within the relevant structure is subject to a low tax rate of less than 25%. 

Such threshold shall now be lowered to 15%. This may be beneficial in particular for real estate investments held in "sandwich structures". Under current law, for example, the generation of German-source rental income in a foreign corporation held by a German investor may be subject to the German CFC rules. This would no longer be the case under the draft bill. Correspondingly, such structures could become more interesting again for German (institutional) investors.


Although the contemplated legislative proposals also bring positive changes, as a whole they have the potential to place a considerable additional burden on an industry that is under significant pressure already. It can therefore only be hoped that at least some of these proposals will not be enacted as they stand now. In any case, existing structures should be examined closely to determine the potential impact and in order to be able to react to them in time.

Content Disclaimer
This content was originally published by Allen & Overy before the A&O Shearman merger

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