In order to become effective, the Annual Tax Reform Act 2019 needs to be approved by the German Parliament (Bundestag) and the German Federal Council (Bundesrat). Hence, it is still unclear if the current wording of the draft Annual Tax Reform Act 2019 will remain unchanged during the upcoming parliamentary procedures. If the Reform Act is successfully entered into law, the above changes to the RETT regulation shall generally apply to transactions which become effective after 31 December 2019.
Currently RETT is triggered inter alia in the following cases:
- direct or indirect unification of at least 95% of the shares in a corporation or partnership owning German real estate in the hands of a single acquiror (Sec. 1 para. 3 RETTA)
- direct or indirect transfer of at least 95% of the shares in a partnership owning German real estate within a period of 5 years to new shareholders (“Partnership Rule”, Sec. 1 para. 2a RETTA)
- direct or indirect economic unification of at least 95% of the shares in a corporation or partnership owning German real estate in the hands of a single acquiror (Sec. 1 para. 3a RETTA)
RETT mitigation schemes for corporations (complete RETT avoidance) were usually structured in way that exceeding the 95% threshold was omitted, e.g. by selling 94.9% of the shares in a corporation owning German real estate to one acquiror whereby the remaining 5.1% were kept by the seller or acquired by an unrelated second party.
RETT mitigation schemes for partnerships (partial RETT mitigation limited to RETT payment on 5.1% of partnership interest) were generally set-up by having the purchaser initially acquire 94.9% interest, and the remaining 5.1% of the partnership interest after a holding period of 5 years.
The published draft of the Annual Tax Reform Act 2019 aims to widen the above RETT regulations and attack the mitigation schemes by including the following changes:
- a decrease of the general RETT triggering threshold from 95% to 90% such that directly or indirectly acquiring at least 90% interests in a partnership or shares in a corporation will trigger RETT
- an extension of the monitoring period from 5 to 10 years (in some cases even 15 years) regarding the above Partnership Rule
- an extension of the Partnership Rule to corporations, which would foresee RETT in case at least 90% of the shares in a corporation are directly or indirectly transferred to new shareholders within a 10 year period.
The draft legislation is published here.