German Real Estate Transfer Taxes: An Update

GLO BAL C API TAL M AR K E T S GR OUP

GER M AN NE WSLE T T ER

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September 2013

The Avison Young Global Capital Markets Newsletter - German Issue I Volume 3, Issue 2 I www.avisonyoung.com 2

The Avison Young Global Capital Markets Newsletter

September 2013

In Germany, changes to the Real Estate Transfer Tax (RETT) Act and increases to transfer tax tariffs, have recently occurred. This newsletter aims to provide you with an outline of the lat-est amendments to the German RETT Act and their impact on RETT efficient transaction structures.

Real Estate Transfer TaxGenerally, whenever real estate located in Germany is traded, the acquisition is subject to RETT. It is common that the pur-chaser bears the full tax amount, although the RETT Act is not specific about it. Also, the tax law does not differentiate when it comes to the use of the underlying asset.

Up until September 2006, German real estate transactions were charged with a uniform nationwide tax rate of 3.5% of the purchase price. New regulations were then set, allowing every federal state to change the RETT rate individually. The govern-

ment anticipated the federal states would reduce RETT in or-der to attract new citizens and encourage companies to settle. However, the opposite occurred. Federal states did not reduce the tax rate, and many have imposed significant increases.

In the first years following 2006, the applicable RETTs ranged from 3.5-4.5%. Today, only Bavaria and the state of Saxony re-main at this level. The other states have increased the taxes – some more than once – with rates in some cases now reaching 5.5%.

In the last few weeks, announcements have indicated that yet another round of increases are forthcoming. Next year, Schleswig-Holstein will become the first federal state to break through the 6% mark when it raises RETT from 5% to 6.5%. The Senate of the State of Berlin agreed in June to increase the RETT from 5% to 6% as of January 2014. The State of Bremen and Lower Saxony intend to apply 5% in the near future.

GERMAN REAL ESTATE TRANSFER TAXES - AN UPDATE

Source: Avison Young

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German Real Estate Transfer Tax ActThe German RETT Act originally provided the ability to set up tax-efficient transaction structures by allowing so-called “RETT Blocker Schemes” which were mostly beneficial to com-mercial real estate transactions. However, amendments to the law enacted on June 7th, 2013 now limit the use of tax-free structures.

We have set out below a brief summary of the changes.

Before June 7th, 2013:“RETT Blocker Schemes” could be used in share deal struc-tures by acquiring the property company through an incor-porated limited partnership, “Kommanditgsellschaft “(KG).

Until June 7th, no RETT was triggered in transactions where the purchaser acquired less than 95% of the property com-pany directly, e.g., in cases where 94.9% of the company was purchased directly by the investor and the remaining 5.1% by the incorporated KG. It is important to note that the purchas-er could fully own the KG. From a tax perspective, the 5.1% shareholder was seen not to be affiliated with the property company, and no RETT was triggered.

Now:According to the new regulations, if the investor owns the KG acquiring the 5.1% share, the investor is considered to have purchased 100% of the property company. The German RETT Act now treats the KG as an affiliate of the property company and RETT is therefore triggered.

While prior to amendments to the Act, RETT could also be avoid-ed if the seller retained 5.1% of the KG for at least five years, post transaction, RETT is now triggered immediately. Even if the seller transfers the remaining shares to the purchaser in year six, this transfer is treated as an economic participation in the transaction.

RETT-exempt structures now only apply if the limited partnership is fully owned by a third-party partnership absolutely independent of the investor.

The Avison Young Global Capital Markets Newsletter

September 2013

Source: Avison Young

Source: Avison Young

Before June 7th, 2013: RETT Blocker Scheme

Now: No Permitted RETT Blocker Scheme

Investor IndependentThird Party

Limited Partnership

“KG”

PropertyCompany

99.9%0.1%

5.1%

94.9%

Investor IndependentThird Party

Limited Partnership

“KG”

PropertyCompany

100%

5.1%

94.9%

The Avison Young Global Capital Markets Newsletter - German Issue I Volume 3, Issue 2 I www.avisonyoung.com

About the author: Udo Stöckl worked for approximately seven years with a major German open- and closed-end real estate fund syndicator and was responsible for acquisitions and dispositions in North America. In January 2011, he joined Avison Young as European Investment Manager. For more information, please contact Udo Stöckl at 416.673.4019 or udo.stoeckl@avisonyoung.com.

The information contained herein was obtained from sources deemed reliable and is believed to be true; it has not been verified and as such, cannot be warranted nor form any part of any future contract.

Avison Young is Canada’s largest independently-owned commercial real estate services company, with offices in To-ronto (HQ) (2), Atlanta, Bethesda, Boston, Calgary, Charlotte, Chicago (2), Dallas, Denver, Detroit, Edmonton, Florida (5), Guelph, Halifax, Houston, Irvine, Las Vegas, Lethbridge, Long Island, Los Angeles (4), Mississauga, Montreal, New Jersey, New York City, Ottawa, Pittsburgh, Quebec City, Raleigh-Dur-ham (2), Regina, Reno, Sacramento, San Diego, San Francisco, San Mateo, South Carolina (3), Toronto North, Tysons Corner, Vancouver, Washington DC, and Winnipeg

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The Avison Young Global Capital Markets Newsletter is designed to inform our clients of current global investment news and develop-ments. This series of newsletters addresses important regulatory and market changes affecting German market participants.

Previous issues of our Global Capital Markets Newsletter are avail-able upon request.

OutlookIn the first half of this year, the total of all transactions in Germany exceeded last year’s first-half numbers by more than 30%. In total, properties amounting € 13.1bn have been traded in the first half of 2013, € 6bn alone in the sec-ond quarter (Q2 2012 was slightly above € 4bn). This trend is expected to continue in the second half and a total in-vestment volume of € 27bn is anticipated for 2013.

Foreign investors, especially from the US and Canada, but also increasingly from the Middle East (Israel) and Asia (South Korea) have shown a continuous interest in larger properties or portfolios in Germany. These investors alone accounted for 30% (€ 4bn) of the total invested capital in the first half of 2013 – the same level as the first half of 2012. The share of transactions by foreigners for all of 2012 was 40%.

Amendments to the German tax law minimize the options to reduce transaction costs by the usage of tax-efficient structures. However, the impact of regulation changes on investor appetite has yet to be determined.

Despite significant changes taking place in the RETT regu-lations this summer, they do not appear to have dampened the enthusiasm of foreign investors contemplating the pur-chase of real estate investments in Germany.

The Avison Young Global Capital Markets Newsletter

September 2013

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