By Thomas Elser
Two important German tax law changes have been proposed by the German legislator that will have significant impact on the taxation of investors in German real estate. Also existing investment structures will be affected. Thus, taxpayers concerned and their advisers should deal with the changes at an early stage.
On 25 June 2018, the German government published its draft bill for an Annual Tax Act 2018. The bill contains inter alia an important change for foreign investors investing in German real estate via foreign holding companies (eg, LuxCos), which is the typical inbound investment structure for foreign investors.
Under current legislation, non-resident taxpayers with profits from the sale of at least 1% equity participations in corporations are taxable in Germany only if the corporation is a company with seat or place of management in Germany. Since the sale of shares in a foreign corporation without seat and place of management in Germany is not subject to taxation in Germany, an exit from a German real estate investment indirectly via a sale of shares in a foreign corporation (PropCo) could be carried out without German taxation. The fact that the foreign corporation is holding real estate located in Germany is totally irrelevant under current law.
The German government now also seeks to tax a capital gain from the disposal of shares in foreign corporations (eg, Luxembourg holding companies in the legal form of a SARL) by non-resident taxpayers if, the value of the shares was based directly or indirectly to more than 50% at any time during the 365 days prior to the sale on domestic immovable property. Also capital gains upon the disposal of less than 1% equity interests in such real estate companies shall be covered and subject to German taxation.
As a result, German tax authorities will exercise a right of taxation, which has already been granted to Germany in a number of double taxation agreements (eg., DBA Luxemburg), which has so far not been exercised under national regulations. The new rules are to be applied for the first time to profits from the sale of shares, which are sold after 31 December 2018. However, only increases in value realized after 31.12.2018 shall be subject to taxation.
The draft bill also contains changes in German Investment Tax Act that has recently been completely reformed (see hereto world.tax article dated 24.04.2018). The planned changes will make a qualification as a tax privileged equity fund or real estate fund easier.
The new German government already expressed in its coalition agreement of 14 March 2018 that certain forms of mitigating the German Real Estate Transfer Tax (RETT) by means of share deals should be restricted. Background to this is that currently in many situations the triggering of RETT upon the transfer of German real estate can be largely or completely avoided in the case of indirect transfers of real estate through the transfer of shares.
Roughly spoken, under current law no RETT is triggered in the following scenarios
This led to the following two basic tax planning approaches in the structuring of transactions with real estate companies:
At a Ministerial Conference on 21 June 2018, major tightening of the RETT Act was proposed:
A draft bill outlining the details of these changes is expected shortly. However, it is unlikely that generous grandfathering provisions will be introduced.
Existing investment structures in German real estate, which were set up with a view to achieving a tax-exempt exit from a German real estate investment by way of a sale of shares in a foreign PropCo, must be reviewed. In certain cases a change of the investment structure should be considered. In addition, a share and real estate valuation will be required by 31.12.2018 to comply with the intended grandfathering rules re an increase in value prior to 2019. As regards the tightening of the RETT rules for share deals, real estate developers, portfolio holders and investors should be make themselves familiar with the intended changes at an early stage. It might make sense that already planned transaction are preferred. In addition, effects on already concluded contracts must be analyzed. This also applies to transactions that have been in existence for some time, which could be affected despite the grandfathering provisions.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Thomas Elser has over 20 years of experience in the field of tax structuring of transactions and investment schemes. He works as a tax partner at TAXGATE and is based in Stuttgart and Frankfurt. Thomas frequently speaks on seminars and conferences to tax related aspects of investments and publishes articles in particular to recent developments in investment tax law and international tax law. He comments on major parts of the German Investment Tax Act in the renowned German investment law commentary Beckmann/Scholtz/Vollmer, Investment-Handbook.
EUCED - European Network for Economic Cooperation and Development is a European Economic Interest Grouping (EEIG), as per EU Council Regulation # 2137/85, established for European and worldwide economic and development operations. As well as, the status of an European Business Association.Read more