Real estate transfer tax reform especially in connection with share deals - the Hare-and-egg game goes into the next round.

November 18, 2019

For many years, the German real estate transfer tax has developed into an increasingly complex area of law. This applies primarily to the so-called supplementary provisions, which have been narrowed down step by step over the years in order to put an end to tax abuse. In doing so, the legislator often overshoots the actual target and discovers new possibilities for creating lucrative sources of finance in the tax tinkering room. In the process, the subject matter is constantly being made even more complicated, so that even experts can see the limits of their intellectual capacity.

With the current real estate transfer tax reform and the turmoil of the legislative process, this undertaking has reached a new climax. Although the legislator saw itself forced to postpone the intended tightening, which is aimed in particular at corporations with domestic real estate (so-called share deals), to the first half of the coming year 2020 due to vehement criticism from the business and professional communities and, most recently, as a result of the opinion of the Bundesrat, it does not reliably indicate when the new regulations will now come into force. In other words, it cannot be completely ruled out that at least parts of the amendments to the law will come into force on January 1, 2020, as originally planned (for the possibility of tax retroactivity, see below in this article).

In corresponding cases, there could therefore be an urgent need for action before the end of the year.

With this practice supplement, we provide an overview of the state of affairs and summarize the basic content of the expected real estate transfer tax changes.

An overview of the main changes to the Act Amending the Real Estate Transfer Tax Act.

The draft bill from August 2019 provides for the following main changes:

  • The participation ratio required for supplementary facts (share unification) is to be lowered from 95% to 90% for all substitute facts subject to real estate transfer tax (§ 1 para. 2a, 3 and 3a GrEStG).
  • The 5-year period previously applicable to partnerships is to be extended to 10 years (§ 1 para. 2a GrEStG).
  • Under the current legal situation, a change of partners of at least 95% (in future 90%) of the shares in a partnership with real property within a period of 5 years (in future 10 years) leads to a tax liability.
  • It is planned to introduce a comparable provision for real estate-owning corporations, although the personal benefits as for partnerships are not to apply here - i.e. for KapGes (§ 1 para. 2b GrEStG (new)).
  • An addition to § 6a GrEStG is intended to ensure, according to the explanatory memorandum to the law, that the tax exemption of the group clause is in principle also applicable if the direct or indirect changes to new shareholders, which trigger the new acquisition event within the meaning of § 1 para. 2b GrEStG, are based in whole or in part on a conversion or contribution.
  • Even though the new regulation is not to come into force until the beginning of 2020, extensive transitional provisions are envisaged which will also have an effect in the past when determining the periods under consideration. For example, it is also to be ensured that in the case of existing structures in which an investor holds at least 90% but less than 95% of the shares, a tax-neutral increase in the shareholding is not possible.

Excessive legislative caution in § 1 para. 2b GrEStG (new).

The legislator justifies the intended new regulation for corporations with the aim of preventing abuse. Accordingly, a corporation with domestic real property is to be taxed if the group of shareholders has changed significantly within a very long period of time - namely 10 years. The term “materially” is not used in the draft law, but it is appropriate if - according to the draft - at least 90% of the shares in the company are transferred directly or indirectly to new shareholders. In this context, the individual shareholders do not have to cooperate in any way, and the individual participation quotas of the individual shareholders of the new shareholder base are not relevant. According to the legislator’s ideas, the corporation - regardless of whether it is a GmbH, AG or other capitalistic legal entity - mutates into a new corporation in the event of a “substantial” change in the number of shareholders. Since the company is no longer the same, the domestic real estate must have been transferred to it - fictitiously, of course. Such a broad - not to say limitless - provision can no longer be justified on the grounds of preventing abuse, because it does not target a concretely identifiable tax avoidance issue. In short, there are quite significant constitutional concerns about this provision. In order to achieve the justification of an abuse prevention rule, the legislator must take as a basis a targeted typification of abuse, e.g. in such a way that only those companies whose assets consist entirely or predominantly of real estate are covered by such a rule from the outset. Only in this context do measures to circumvent the real estate transfer tax appear objectively conceivable.

Proposed amendments of the Bundesrat

On 20.09.2019, the Bundesrat critically commented on the planned amendments to the Real Estate Transfer Tax Act with regard to share deals. In particular, the Bundesrat proposes the addition of a so-called stock exchange clause to limit the planned Section 1 (2b) GrEStG (new) to a reasonably reasonable level. According to this, the new provision is not to apply to corporations whose shares are predominantly admitted to trading on a domestic or EU/EEA foreign stock exchange or on a third-country trading venue regarded as equivalent by the EU. The stock exchange clause is also to apply when examining the existence of a new shareholder of intermediary corporations for the change of ownership of shares in real estate-owning partnerships (addition to the already existing Sec. 1 (2a) GrEStG). Further suggestions of the Bundesrat concern questions of temporal application - in particular to safeguard the principle of protection of legitimate expectations - and the group clause of Sec. 6a GrEStG.

Reaction of the Federal Government

In a press release, the fiscal policy spokespersons of the coalition factions announced on October 24, 2019, that the legislative process to curb share deals in real estate transfer tax could not be completed in the short term after all and would therefore not enter into force on January 1, 2020, as originally planned. The legislative process would now be completed in the first half of 2020. The legislative implementation needs - as is now recognized - somewhat more time. The following day (Oct. 25, 2019), the federal government issued a rapid counterstatement to the Bundesrat’s statement in the form of printed matter 19/13546. Regarding the proposals concerning Section 1 (2a) and (2b) GrEStG (stock exchange clause), it states: “The Federal Government agrees with the concern pursued by the amendment. However, the concrete form of the proposal requires in-depth examination.” The advice on the amendment of Sec. 6a GrEStG (group clause) would be examined. However, forthcoming decisions of the BFH on Section 6a GrEStG should first be awaited. There are currently several pending cases with the reference numbers BFH II R 15/19; BFH II R 16/19; BFH II R 17/19; BFH II R 18/19; BFH II R 19/19; BFH II R 20/19 and BFH II R 21/19. Against this background, we believe it is unlikely that the announced review of the Section 6a GrEStG amendment can be completed during the current legislative process.

Stock Exchange Clause - the Minimum Correction

The Federal Government will have to follow the advice of the Bundesrat at this point, because the way the draft of Sec. 1 (2b) GrEStG (new) has been presented so far, there is an impossibility of determining the facts in the case of listed stock corporations (or KGaA or SE) and the provision must be objected to from the point of view of the uniformity of tax enforcement. It will simply be impossible to determine exactly how the shares/units move in stock exchange trading into other hands. In any case, the reporting obligations of the person required to report under Section 33 (1) of the German Securities Trading Act (WpHG) are not sufficient in this respect. Incidentally, in this respect, it only needs to be kept in mind that e.g. the companies listed in the DAX (the index represents approx. 80% of the market capitalization of the KapGes listed in Germany) are owned by foreign investors to a significantly greater extent than 50% and - above all - that approx. 82% of the shares are in free float (according to DAX analysis EY April 2018). Furthermore, the turnover rate of the shares is sufficient to repeatedly trigger real estate transfer tax on the company’s own operating properties at estimated intervals of three to four years. Unless one protects oneself with an anchor shareholder, capital and stock market values are constantly destroyed at the expense of the shareholders as well. BASF estimates - if the German government’s legislative idea is not stopped - that real estate transfer tax will even be incurred almost annually, with a tax burden in the three-digit million range in each case. In addition, it should be pointed out, particularly in the case of listed corporations, that shareholders who invest in the anonymous capital market do not aim to acquire real estate with their corporate holdings, but rather to participate in the earning power of the corporations - i.e. to receive consideration for the capital contribution in the form of dividends and/or price gains. This cannot be countered with a fiction under transfer tax law. If this is done, however, we are on the wrong track in terms of the tax system.

Need for action from a fundamental perspective - tax retroactivity not ruled out if necessary

Apart from the potential consequences outlined above in the environment of the listed groups and the controversial discussions triggered by this, the real estate industry in particular, but also medium-sized groups of companies, must prepare themselves for the new regulations to be expected. This currently concerns the question of when the - probably still to be revised - amendments to the law will come into force. Originally planned for Jan. 1, 2020, according to the counterpoints of the Bundesrat and in view of the wording of the coalition’s press release from October, it appears that the amendments to the law will not take effect until a later date in the course of 2020. Moreover, the previous bill was forward-looking and did not include any tax retroactivity. However, this is not a reliable basis for estimating the timing of the upcoming implementation of the law, especially since the announcements to date - including the press release mentioned above - do not fundamentally rule out a retroactive effect to January 1, 2020. Such an approach would be a case of so-called genuine retroactivity, in which the legislator has to observe narrow constitutional limits. However, there is an exception to the prohibition of retroactive effect if confidence in the continued existence of a tax law provision - albeit for a limited period - has already been destroyed. Based on the decisions of the BVerfG, which, however, have not yet dealt too frequently with (transport) taxes arising at a specific point in time, it could be assumed that the trust worthy of protection is already forfeited with the publication of the first draft law. It remains to be seen whether the legislature will be tempted to enact the law retroactively given the current severity of its action against - for the most part only alleged - abusive strategies of avoiding real estate transfer tax. In any case, it is urgently recommended that transactions affected by the planned amendments to the law be completed within 2019 or brought forward to the current year. In addition, it should be mentioned that the new regulations on real estate transfer tax should also be integrated into corresponding tax compliance systems in order to avoid unintentional real estate transfer tax caused by related processes or warning levels. This is particularly advisable for corporate groups with a complex or multi-layered structure.


If a transfer of shares in a corporation with domestic real estate is intended, urgent attention must be paid to the tightening new regulations with the upcoming real estate transfer tax reform. These regulations are in part complicated and very incisively narrow the tax structuring environment - in part rightly, in part wrongly. Although the reform has been postponed until the second half of 2020, it is uncertain whether the sharp sword of a tax retroactive effect to January 1, 2020 will be used. At any rate, this cannot be ruled out entirely. Transactions affected by the new regulations should, if necessary, be implemented in good time before the end of the year in order to still be covered by the current land acquisition regulations. With regard to the aforementioned amendment of a stock exchange clause in Sec. 1 (2b) GrEStG (new), it is to be hoped not only for the groups but also for all investors who rely on German shares in their portfolios that the German government will use the fresh momentum of the new year to bring the tax repair tongs into action.