The German Act to Modernize the Law on Partnerships (MoPeG) will fundamentally reform the legal treatment of partnerships as of 2024. This civil law reform will also have an impact on tax law – namely real estate transfer tax law. Accompanying tax changes in the tax codes are urgently needed.
The German Federal Ministry of Finance (BMF) has recognized the need for change and has now published a draft to reform the real estate transfer tax act. A major overhaul of the real estate transfer tax act is being considered.
The reform proposals at a glance
As a result of the MoPeG, the so-called “Gesamthand” (joint ownership) will largely cease to apply as of January 1, 2024. In the current system, this dogmatic concept for partnerships serves as the justification for a different treatment in comparison to corporations, in particular for tax-neutral real estate transfers to or by partnerships.
If there is no change in the law, the MoPeG will automatically lead to the loss of (existing and future) tax benefits. A “small solution” would provide a remedy, according to which there would be, at the turn of the year, no automatic infringement of retention periods stemming from tax benefits granted in the past. In addition, the extension of the existing benefits in a way that is neutral concerning the legal form (“medium solution”) has been discussed. According to the current draft neutrality concerning the legal form even for share deals (“large solution”) shall be accomplished. The large solution is apparently based on the real estate acquisition tax modernization model (so-called MoMo) recently presented by the “Real Estate Transfer Tax Working Group”:
- The large solution involves the abolition of the current share deal provisions in the tax code, replacing it with a new regulation which is based on the unification of all shares (i.e. 100%) in a real estate company. The previous 90% limit and the ten-year period are replaced by undefined legal terms (“acquisition group” and “serving interest”). The intention is to, in the future, make structures liable for taxation that previously utilized the rigid limits and time periods.
- The “acquisition group” is intended to include co-investor arrangements as subject to real estate transfer tax. It therefore applies if different persons have objectively coordinated their acquisitions with each other in a material or temporal context.
- “Serving interest” refers to shares held by a person in the interest of a purchaser or member of a group of purchasers. The underlying model for this is the case law on own shares and on so-called disenfranchised partners.
- The new terms are to be substantiated by non-exhaustive standard examples that can be refuted in individual cases. This is intended to give greater consideration than before to the particularities of individual cases. It can be assumed that the vagueness of the terms will lead to considerable questions of interpretation in the short term; in the medium term, it will also offer opportunities for (re)structurings regarding real estate transfer tax.
- Furthermore, the MoMo provides for the abolition of existing tax benefits and their replacement by new tax concessions, taking mainly into account the economics of real estate investments as well as economic reality in general. Tax-free transfers within a 100% group will become possible in many cases.
The draft also addresses the attribution of real estate for various investment fund structures. According to the paper, real estate is to be attributed directly to the investment fund in all cases and not just to the capital management company. This is intended to rule out the possibility of “unit deals” that optimize real estate transfer tax by transferring interests in the investment fund.
The amendments would come into effect as of 2024. However, intensive legal policy discussions are to be expected between the federal and the state governments. A real estate transfer tax reduction for the acquisition of owner-occupied real estate, which the FDP has demanded, will also play a significant role in this context.
At present, it is not possible to predict the outcome of these discussions and whether the small, medium or large-scale real estate transfer tax reform will be implemented. However, the ambitious timetable of a reform by the end of the year requires careful monitoring of developments for real estate investors.