From Germany: Reformed Tax Rules
28 February, 2019
According to a recently published report in Forbes magazine, Germany will continue to be – along with Greece, Cyprus and Malta – one of the hottest property markets in Europe in 2019. Although the upward trend has been continuing for more than 10 years, Germany is still regarded as a safe haven and therefore an attractive market for real estate investments. The reasons for this are mainly appropriate financing conditions, a stable economic situation, continued population growth and other factors. Brexit developments also play a role. Reason enough to draw attention to some current legal and tax developments in this context.
REFORMED TAX RULES:
Reformed Capital Gains Taxation re PropCo Share Sales
According to previous German domestic law, capital gains realized by non-resident shareholders from the sale of German property companies were not taxable in Germany (despite reformed OECD model standards). In a second attempt, the German legislator has now adopted new rules to fix this. From January 1, 2019 onwards, such capital gains will be subject to a (limited) German tax liability. Good news is that hidden reserves allocable to periods before 2019 will not be taxed. On this basis, some investors take the opportunity to now quickly transfer such shareholdings from holding companies that have modern tax treaties with Germany (e.g. Luxembourg, Great Britain, Netherlands, Spain) to holding companies in other countries that don’t (e.g. Switzerland, U.S.).
Pending RETT Reform for Share Deals
German Real Estate Transfer Tax rules shall be reformed for share deals in order to avoid structuring around RETT by investors. According to current law, shares in real-estate owning corporate entities may be transferred free of RETT if at least 5.x % of the shares are transferred to an unrelated party; interests in real-estate owning partnerships may be transferred free of RETT as long as 5.x % are not transferred for a period of at least five years (with the subsequent transfer of the 5.x % after that period triggering RETT only on the 5.x %). While the reform process has been long pending, informal legislative proposals have recently been discussed by the Federal Ministry of Finance and the Ministries of the Federal States. Expected features of the reformed rules are as follows: the above concept for partnerships shall be made applicable to corporate entities, too; the threshold is brought down from 94.99% to 89.99% and the above holding period is extended to 10 years. Due to uncertainty as to when new rules will become effective, investors already tend to structure acquisitions accordingly.
Pending Land Tax Reform
In April 2018, the German Federal Constitutional Court found German land tax rules to be outdated and unconstitutional due (considering that tax bases had been calculated on very old values per 1935 or 1964, depending on the property’s location). Old rules must now be made compliant before 2020, but the reform process has proven difficult with an informal compromise solution recently presented. One of the most disputed features of the reform is having local average net rents as factors to determine the tax base. While details are yet unclear, there will be winners and losers of the reform, i.e. tax payers with much higher land tax bills and tax payers with no increase (or maybe even a decrease). With regard to let properties, German land tax has been borne by the lessee. This concept is expected to remain unchanged but also that is still disputed.
Pending Implementation of Council Directive (EU) 2018/822 on Cross-border Arrangements
A legislative proposal has been made to implement a recent EU Directive regarding reporting requirements for cross-border arrangements in Germany. The proposal aims to introduce corresponding reporting requirements also for purely national arrangements. Once adopted reporting requirements for tax payers and intermediaries (e.g. lawyer, tax advisors, notaries) are expected to result in increased compliance obligations also for a large number of real estate transactions.