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Germany: Government To Close Loopholes Allowing the Avoidance of Land Transfer Tax on “Share Deals”

25 October 2018

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The acquisition of real estate property located in Germany is subject to German Land Transfer Tax or „Grunderwerbsteuer“.

The tax is calculated on the basis of a percentage of the consideration for the sale. The exact percentage is set by the different German states and varies between 3.5 and 6.5% of the consideration. The sale of any legal entity (private limited company („GmbH“) or company on stocks („AG“)) or of a partnership which owns title in real estate property is also subject to Land Transfer Tax, however certain exemptions still apply:


(i) The sale and acquisition of shares in a partnership is not subject to the tax if more than 5% of all shares remain with the seller(s) for at least 5 more years;
(ii) The sale and acquisition of all shares in any entity is not subject to the tax unless all shares are being transferred to the same new shareholder or to shareholders which are directly or indirectly owned 100% by the same ultimate beneficiary.

Often, real estate property is owned by Special Purpose Vehicles (“SPV“), usually in the legal form of a German private limited company. To avoid Land Acquisition Tax, it is common to purchase property by means of a share deal and to purchase all shares in such SPV by two independent new shareholders. Up until now, taxation could be avoided if the “second Purchaser“ acquired more than 5% of all shares in the SPV. Often, the ultimate beneficiary of the „second Purchaser“ is a close relative of the ultimate beneficiary of the “first Purchaser” (e.g. wife, brother or descendent).

Germany’s new Government aims to close this loophole and has recently announced their ideas for a modification of the Act on Land Transfer Tax.

The threshold applicable on the sale and acquisition of shares in a partnership is supposed to be raised. Such sale and acquisition shall not be subject to Land Transfer Tax as long as more than 10% of all shares remain with the seller(s) for no less than 10 years.

The requirements with respect to the sale and acquisition of shares in a legal entity are supposed to meet those for the sale and acquisition of shares in a partnership. Hence, any transfer of 100% of shares in any entity will lead to Land Transfer Tax - even if the shares are taken over by two or more Purchasers.

Obviously, most investors are not interested in the acquisition of any SPV unless 100% of all shares are purchased by entities or persons that are informally related to the investor. Therefore, it will no longer be possible to purchase real estate property by means of a share deal in order to avoid Land Transfer Tax.

According to latest rumours, the new law will come into force by 1 January 2019. All investors who are considering selling or purchasing property by way of a share deal should therefore ensure that the intended transaction is closed as soon as possible and in any case prior to 31 December 2018.

For more information, contact Christian Steden, partner at Kärgel de Maizière & Partner via e: steden@kaergel.com

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