German Federal Parliament approved transitional rule to allow for continued applicability of RETT exemption rules relevant for partnerships

On 17 November 2023, the German Federal Parliament (Bundestag) approved the Growth Opportunities Act (Wachstumschancengesetz) which provides for the inclusion of a transitional rule in Sec. 24 of the German Real Estate Transfer Tax Act (GrEStG) suspending the effects of the Act on the Modernization of the German Partnership Law (MoPeG) on German Real Estate Transfer Tax (RETT) law which would otherwise take effect from 1 January 2024. More specifically, Sec. 24 GrEStG as approved by the German Federal Parliament (Draft Sec. 24 GrEStG) (which was not included in the government draft of the Growth Opportunities Act) provides for the continued applicability of the ‘joint ownership principle’ (Gesamthandsprinzip) in relation to partnerships for German RETT purposes for a transitional period ending on 31 December 2024 (the Transitional Period). As a result, if enacted, the exemption rules in Sec. 5 para. 1 and 2 and Sec. 6 para. 1 to 3 GrEStG relevant for transactions involving ‘joint ownerships’ would continue to be applicable for partnerships throughout the Transitional Period.

The Growth Opportunities Act is still subject to the consent of the German Federal Council (Bundesrat), although as we explain further below, we do not expect Draft Sec. 24 GrEStG to be controversial.

Background – Impact of MoPeG on German RETT law

With the MoPeG entering into force on 1 January 2024, the asset attribution principle in Sec. 718 BGB, the so-called ‘joint ownership principle’ will be abolished. Hence, with effect from 1 January 2024, partnerships with own legal personality (including civil law partnerships (GbRs) will therefore no longer qualify as ‘joint ownerships’ (Gesamthand) for German civil law purposes.

According to Sec. 5 para. 1 and 2 and Sec. 6 para. 1 to 3 GrEStG, the transfer of German real estate assets to, from or between ‘joint ownerships’ is exempt from German RETT to the extent the pro rata entitlement to the relevant real estate asset is not affected by the transaction (subject to certain conditions being met, including a ten-year holding period). Accordingly, for German RETT law purposes, the abolishment of the ‘joint ownership principle’ through the MoPeG would mean that the exemption provided by Sec. 5 para. 1 and 2 and Sec. 6 para. 1 to 3 GrEStG would no longer be applicable in relation to partnerships with own legal personality, such as civil law partnerships and commercial partnerships (OHGs, KGs etc.). 

Introduction of Draft Sec. 24 GrEStG as part of the Growth Opportunities Act 

Against this background, the introduction of a provision ensuring the continued application of the ‘joint ownership principle’ for German RETT purposes as part of the Growth Opportunities Act was highly anticipated. Pursuant to Draft Sec. 24 GrEStG, partnerships with own legal personality (as defined in draft Sec. 14a para. 2 no. 2 of the German Fiscal Code (AO)) qualify as ‘deemed joint ownerships’ for German RETT purposes throughout the Transitional Period (comparable to draft Sec. 39 para. 2 no. 2 AO relevant for income tax purposes and draft Sec. 2a ErbStG relevant for inheritance and gift tax purposes). As a result, if enacted, the exemption rules in Sec. 5 para. 1 and 2 and Sec. 6 para. 1 to 3 GrEStG would continue to apply to real estate transactions involving partnerships which become effective before 1 January 2025.

Outlook

Due to the classification of the Growth Opportunities Act as a consent act (Zustimmungsgesetz), its final adoption requiresthe consent of both the German Federal Council and the German Federal Parliament. We understand that it is likely that the Mediation Committee will be convened for negotiations between the parties. However, it is, in our view, not likely that Draft Sec. 24 GrEStG will be controversial as the German Federal Council had already recommended the inclusion of a (different) provision ensuring the continued application of the ‘joint ownership principle’ for RETT purposes. Even though facing a very tight timeline, the parties are still aiming to complete the legislative process by 15 December 2023.

The inclusion of a provision ensuring the continued application of the ‘joint ownership principle’ for RETT purposes in the Growth Opportunities Act is, in our view, a positive (albeit very belated) development. Due to its temporal limitation, the introduction of such provision will not, however, bring complete legal certainty. For example, the risk remains that if the relevant ten-year holding period is not already met upon expiration of the Transitional Period, RETT might be triggered as of 1 January 2025 when Draft Sec. 24 GrEStG ceases to be in force. Furthermore, it is not yet clear whether the German legislator will initiate a significant reform of the German RETT law (Modernisierungsmodell für das Grunderwerbsteuerrecht, MoMo) within the Transitional Period.

If you would like to discuss the issues raised in this blog post, please get in touch with the authors or your usual Freshfields contact.