Structuring of real estate transactions for the purpose of optimizing real estate transfer tax

Now that many federal states have raised the real estate transfer tax to 6.5%, the real estate transfer tax is becoming a cost driver, or in some cases even a deal-breaker in larger real estate transactions. This is because at a rate of 6.5%, the expense for the buyer is no longer an economically negligible ancillary service which has no substantial influence on the purchase price, which is usually determined according to capitalised earnings value aspects.

It is therefore obvious that practice is looking for structures in which the accrual of real estate transfer tax can be avoided.

For a long time, it was therefore common practice to carry out real estate transactions not in the form of an asset deal (purchase in kind, i.e. purchase of the property itself), but in the form of a share deal in which not the property itself but the shares in a company holding the property are the object of purchase. In the case of share deals, the real estate transfer tax could be avoided in any case if not 100 % of the company shares were sold, but less than 95 % of the shares were transferred to new shareholders within a period of 5 years (§ 1 para. 2 a GrEStG).
In the context of the planned reform of the Real Estate Transfer Tax Act, the legislator intends to make this type of share deal (sale of less than 95% in a period of 5 years) unattractive by not only doubling the percentage from 5% to 10%, but also by extending the retention period for the minority shareholding from 5 to 10 years. This change in the law has not yet been passed by the Bundestag, but is in preparation.

Therefore, the practice is looking for new ways to circumvent this complication of share deals. As an alternative to these common transactions, it is possible to structure the real estate transaction as a kind of transfer of fund shares (so-called unit deals). This is a share deal. In this sales structure, shares in a fund are sold. However, the shareholders who sell their fund units are not the owners of the property for civil law and tax purposes; instead, the owner of the property is a capital management company acting as an intermediary for civil law and thus for tax purposes. In this case, the property is structured as a real estate special fund through appropriate contractual arrangements, which is not responsible for managing the fund but an external capital management company. This capital management company manages the Fund for the account of the investors in accordance with the investment requirements laid down in the contractual arrangements between the investors and the management company. This is regularly structured in a so-called fiduciary solution, whereby the properties are allocated to the capital management company, which holds them for the account of the investors as the owner under civil law.

So if one or more investors then sell their shares in the fund, there is basically no land transfer tax because the property is still owned by the capital management company.

However, it should be clarified that the contribution of a property to a special fund becomes a transaction subject to real estate transfer tax. After this contribution transaction, however, any subsequent sale of the fund units is exempt from land transfer tax.

Therefore, this construction is especially suitable for cases. In cases where a structure independent of the seller is to be created in the long term, or where short-term sales proceeds higher than the own acquisition costs are to be expected.