On 21 June 2018, the Hessian Ministry of Finance issued a press release according to which the finance ministers of the Federal States agreed on several measures to aggravate the implementation of tax structures to avoid German real estate tax in case of share deal transactions. Pursuant to the press release, it is to be expected that, in particular, Sec. 1 Para. 2a, 3 and 3a German Real Estate Transfer Act ("RETT Act") will be amended in the near future to implement the following key measures:
Lowering the relevant participation threshold from 95% to 90%
The participation threshold relevant for all share deal transactions triggering real estate transfer tax under Sec. 1 Para. 2a, 3 and 3a RETT Act shall be reduced from at least 95% to at least 90%.
Lengthening of the monitoring periods from 5 to 10 years
The currently applicable monitoring periods shall be extended from 5 years to 10 years.
Introduction of a new real estate triggering event in case of a change in the shareholder structure of a corporation
Under current tax law, RETT is triggered if at least 95% of the partnership interests in a partnership owning German real estate are transferred, directly or indirectly, to new partners within a monitoring period (Sec. 1 Para. 2a RETT Act). Such provision shall now also apply to corporations and the threshold shall be reduced to 90% (which could be problematic for listed corporations). Consequently, a RETT optimized, complete purchase of a shareholding together with a co-investor shall be made impossible (i.e., an existing shareholder must continue to hold a significant minority participation).
It is to be expected, that the proposals of the finance ministers will be implemented in due course, whereby changes could still occur within the legislative process. It is currently unclear when the lowered threshold and the lengthened monitoring periods will become applicable and which effects the proposed changes will have on existing structures (e.g. structures including a put option exercisable after 5 years by the minority shareholder). In particular, the press release does not indicate whether there will be a grandfathering rule. It is not unlikely that the new rules will come into force as of the date on which a bill is submitted to the Parliament. Until then, there might be a short time window to adjust existing structures, if necessary.
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