90 per cent threshold
The political agreement states that for both, the Unification rule and the Partnership Rule, that the threshold will be reduced to 90 per cent. This does not sound as bad as the 75 per cent and 50 per cent which were publicly discussed and which would have been accompanied with a rule that the RETT would only apply proportionately. However, significant doubts had been mentioned that a reduction to 75 per cent or 50 per cent could be unconstitutional, because the tax would not qualify as a real estate transfer tax anymore, but a share transfer tax. The similarity of the share deal to a sale of real property would not bhave been given anymore. Apparently the state treasurers take the view, that a threshold of 90 per cent will be regarded as constitutional. But we can imagine that this can still be challenged.
10 year holding periods
The proposal of the state treasurers says that all 5-year periods in the RETT Act shall be extended to 10 years. In our understanding this means that the Partnership Rule will be triggered if 90 per cent of the partnership interests are transferred to new partners within any 10-year period. But it most likely also means that the 5-year holding periods applicable to the Partnership Exemptions will be extended to 10 years.
This is quite a harsh change, as hardly any business can remain unchanged for 10 years in the current fast growing and changing business environment. We would hope that this extension will still be subject of a parliamentary debate in which either the holding period will be reduced to 7 years, which would still be a very long time or maybe at least the changes to the Partnership Exemptions are kept at 5 years or extended to 7 years only.
We would also expect that those changes will apply to 5 year periods which have already started to run. This would be quite dramatic for those structures where a seller has been granted a put-option for the partnership interests after expiry of 5 years. If the rules are now changed it may be possible that the seller can still exercise its put option, but RETT will now be triggered under the new rules. Purchasers and Sellers will have to negotiate whether such put-options can be extended to 10 years following the changes to the RETT Act.
Application of Partnership Rule to companies
The state treasures proposed that the Partnership Rule shall also apply to companies, not only to partnerships. This is maybe the most significant change, because it would change the entire systematic of the RETT law. So far the RETT rules differentiate in a quite sophisticated way between the rules applicable to property owning companies and property owning partnerships. The Unification Rule is set up as a fiction according to which the property is deemed to be sold or transferred to the ultimate acquirer in whose hands 95 per cent (or in future 90 per cent) or more of the shares are unified. As a consequence, it is the acquirer who is liable for the RETT. In contrast, the Partnership Rule follows a different fiction. It assumes that if 95 per cent (in future 90 per cent) or more of the partnership interests are transferred to new partners within 5 (in future 10) years, then the property is deemed to be transferred to a new partnership formed by the new partners. Consequently, under the Partnership Rule the partnership is liable for the RETT and not the acquirers of the partnership interests.
If the concept of the Partnership Rule is now extended to companies, this is a systematical game changer. It will be interesting to see how the German Finance Ministry proposes to implement this change. It could go as far as eliminating all changes between partnerships and companies in the RETT Act, if it introduces also for companies the fiction that the property is transferred to a new company if 90 per cent of the shareholders of a company change.
If this is thought through, then the Federal Finance Ministry should take the other consequence, and also apply the Partnership Exemptions to companies and not only to partnerships, as this would be the logical consequence of the systematical change. The political agreement does not mention this consequence and it is likely that this has not been though through. We therefore may end up in some discussions around the introduction of the specific legislation or in a worst case scenario a quite unsystematic change to the RETT Act which would make future structurings even more challenging and court decisions on RETT even more unpredictable.