Avoiding Real Estate Transfer Tax
Investment in German real estate regularly triggers real estate transfer tax. The tax is imposed as a percentage of the purchase price or the asset value. The tax rates range from 3.5%, e.g. in Bavaria, to 6.5%, e.g. in North Rhine-Westphalia.
Transactions concerning valuable real estate are commonly structured as share deals to avoid the real estate transfer tax ("RETT-Blocker").
Example:
Acquisition of a business building in Duesseldorf (North Rhine-Westphalia) for 5 million Euro. The real estate is held by a German GmbH. If the deal is structured as an asset deal, the real estate transfer tax will be 6.5% of 5 million Euro = 325,000 Euro. One possible solution for a share deal would be: The main investor acquires 94% of the shares. The remaining 6% of the shares are sold to an unrelated party. In this case no real estate transfer tax will be imposed. Obviously a share deal has other legal implications which have to be taken into account.
If you want to use a RETT-blocker you have to navigate the various legal pitfalls of the German real estate transfer tax code, for example:
- If the real estate is held by a corporation (e.g. Ltd. or a German GmbH) the unification of 95% or more of the shares in the same hands triggers RETT. This also applies to indirect unifications.
- If the real estate is held by a partnership the transfer of 95% or more of the shares to new partners within five years triggers RETT. This also applies to indirect transfers.
- Certain economic participations of at least 95% can also trigger RETT in a partnership and a corporation.
The German government plans to restrict the use of RETT-Blockers further:
- The threshold of 95% is to be reduced to 90%.
- The holding period of five years is to be extended to 10 years.
- The rules applicable to corporations are to be aligned with the rules applicable to partnerships. The transfer of 94% to the main investor and the remaining 6% to an unrelated acquirer within 10 years would also trigger RETT.
Nevertheless it will still be possible to use RETT-optimised structures in the future.