German Real Estate Transfer Tax and Investment Funds

Discussion Draft for a German RETT Reform: contractual investment funds, their managers and fund investors need to watch out

Discussion Draft for a German RETT Reform 

The Federal Ministry of Finance is proposing another German Real Estate Transfer Tax (“RETT”) reform, the Discussion Draft for which was published on 4 July 2023, but bears the date 15 June 2023 (“Discussion Draft”). The main objective of this Discussion Draft is to achieve an equal taxation of share deals irrespective of the legal form of the company, i.e. not to distinguish between corporate entities and partnerships. 

The Discussion Draft would mean a massive change to well-established principles of German RETT law and the introduction of rather vague new concepts (“acquisition group”, “serving interest”) which are likely to create legal uncertainty if and when a RETT liability is triggered. Against this background, it remains to be seen whether the Discussion Draft or a similar RETT reform will be implemented at all, and in particular the timeframe envisaged by the Discussion Draft (entry into force on 1 January 2024) is considered by many to be extremely ambitious.

Despite these uncertainties, investment funds, fund managers and fund investors should pay attention to these developments as the Discussion Draft (for the first time) also contains provisions specifically addressed to certain investment funds with German real estate investments which could result in fundamental changes to their RETT treatment.

Investment funds with German real estate investments

Current RETT principles for investment funds

As of today, the German RETT Act does not mention investment funds. As a result, the German RETT treatment of investment funds, in particular investment funds that are not established as separate legal entities but rather as contractual asset pools (Sondervermögen, “Contractual Funds”), has been developed through administrative practice and (scarce) case law. On this basis, a distinction has to be made between Contractual Funds where civil law ownership is held by the fund manager as trustee of the investors (so-called Treuhandlösung) and Contractual Funds where the investors are for civil law purposes co-owners of the assets (so-called Miteigentumslösung). With regard to real estate, the co-ownership model is only available for Special-AIFs (i.e. investment funds that are restricted to professional and semi-professional investors).

• Under the trust model, the Federal Fiscal Court has confirmed that the real estate investments of a Contractual Fund are for RETT purposes attributable to the fund manager and not to the investors. Consequently, the transfer of fund units does not give rise to German RETT.
• In contrast, under the co-ownership model, real estate investments are attributed to the fund investors so that, for example, the transfer of real estate to a Contractual Fund where the previous owner is the sole fund investor does, in principle, not trigger German RETT.

Fundamental changes under the Discussion Draft for investment funds

If the latest Discussion Draft becomes law – and that is still a big if – the treatment of Contractual Funds with German real estate investments could change fundamentally in particular with regard to two aspects.

First, the Discussion Draft introduces a new provision specifically addressing German Contractual Funds and comparable foreign investment funds. Under this new provision, a Contractual Fund qualifies (i) as a real estate company if real estate is attributable to it or (ii) as an intermediate company if shares in a real estate company are directly or indirectly attributable to it. This ties in with the new basic concept pursuant to which German RETT is triggered in the event of a transfer of shares in a real estate or an intermediate company leading to the unification of all shares in a real estate company.

Secondly, and significantly, the Discussion Draft provides that real estate is also attributable to a Contractual Fund where the real estate is held by the fund manager for the Contractual Fund and the real estate is attributable to that fund manager. Although there is no clear reference to the established civil and regulatory law concepts, it has to be assumed that the purpose of this provision is to overrule the above-mentioned case law of the Federal Fiscal Court. This would result in an attribution of real estate to the Contractual Fund and by extension its investors in cases of the trust model. However, the Discussion Draft does not stop with that. As indicated by the wording (“also”) and confirmed by the reasoning, the draft provision intends to stipulate an attribution to the Contractual Fund and the fund manager, so that both may qualify as real estate or intermediate companies at the same time.

Needless to say, this new concept leaves a lot of room for improvement and raises many questions. To name but a few:

• Why is the wording not aligned with the civil and regulatory law terminology?
• Would the concept of double attribution of real estate not result in excessive RETT consequences?
• Would the new concept also apply to Contractual Funds using the co-ownership model?
• How do the new rules interact with the revised exceptions in the Discussion Draft?

Watch out

Even though it is quite uncertain whether the Discussion Draft will pass the legislative process (and, if so, in what form), given the fundamental changes to the German RETT regime being proposed, Contractual Funds, their managers and fund investors should pay close attention.

If you would like to know more about these issues you can get in touch with the authors of this post or any of your usual Freshfields contacts.