All over now? Federal Parliament approves RETT blocker avoidance rules

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Ashley Benson
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1 Ashurst Frankfurt June 2013 All over now? Federal Parliament approves RETT blocker avoidance rules Introduction The Federal Parliament (Bundestag) has approved the introduction of a new Section 1 para. 3a to the German Real Estate Transfer Tax Act ("RETTA") which aims to avoid so called "RETT blocker" structures. RETT Blocker Structure Under the RETTA, real estate transfer tax ("RETT") is triggered if an investor (or a group of related party investors) acquires, directly or indirectly, at least 95 % of the shares/interest in a company/partnership that holds real estate. An attribution of shares held indirectly through another entity requires that the investor (also) holds at least 95 % of this other entity. Any shareholdings below this threshold are disregarded for RETT purposes. Up to now, a way to tax optimize such an acquisition was by the interposition of an additional vehicle ("SPV") between the target company holding real estate and the investor. Thus, the investor directly acquired only 94.9 % of the shares in the target and held 94.9 % of the SPV's shares. The SPV in turn acquired the remaining 5.1 % in the target. The 5.1% of the shares in the SPV which were not held by the investor were held by a third party independent from the investor. Typical RETT Blocker Structure: Minority Investor Investor 5,1% 94,9% RETT- Blocker Partnership 94,9% 5,1% PropCo AUSTRALIA BELGIUM CHINA FRANCE GERMANY HONG KONG SAR INDONESIA (ASSOCIATED OFFICE) ITALY JAPAN PAPUA NEW GUINEA SAUDI ARABIA SINGAPORE SPAIN SWEDEN UNITED ARAB EMIRATES UNITED KINGDOM UNITED STATES OF AMERICA

2 Although such structures resulted in the investor economically owning almost all of the shares in the target, no RETT was triggered. This was based on the fact that the RETTA, until now, did not follow an economic approach requiring only that the 95% minimum shareholding was fulfilled at each level. The New Rule The new Section 1 para. 3a RETTA deviates from the above mentioned strict formal approach and introduces an "economic shareholder" concept pursuant to which the direct or indirect acquisition of an "economic shareholding" of at least 95 % triggers RETT. Indirect shareholdings in the company holding real estate are calculated by multiplying the directly and indirectly held shareholdings. The "economic shareholding" is the sum of all shareholdings. In the example above, this would mean that the "economic shareholding" amounts to 99.94% (94.9% + (94.9% x 5.1%)). It is currently unclear what kind of investments qualify as an "economic shareholding", e.g. whether a silent partnership could also qualify for this purpose. This new concept applies to acquisitions occurring from the day after the Federal Parliament approved these changes, i.e. to all transactions entered into on or after 7 June Existing structures are not affected. Future Structures Although the fiscal authorities hope that the introduction of the "economic shareholder" concept will increase the amount of RETT paid we believe that this instrument will turn out to be a non-starter. The increase of the RETT rates in the past (see the summary below) led to investors in German real estate recognizing RETT as a true cost block which could affect the overall performance of an investment. As a consequence, investors accepted RETT blocker structures which require that an independent minority investor participates in the investment, with a relatively low participation. From our perspective the new rules will lead to institutional investors increasingly entering into joint venture investments where they act either as "junior partner" or "senior investor", i.e. holding only a 5.1 % interest or the 94.9 % majority stake. Provided that the investors are independent parties such joint investments would not fulfil the "economic shareholder" condition and a share deal would still be RETT free.

3 3.5 % 4.5% 5% 5.5% 5%, in future 6.5% * Graphic generated using material provided by DeStatis according to the Creative Comments-License

4 RETT Rates by Federal State (11 June 2013) Baden-Würtemberg 5% Bayern 3,5% Berlin 5% Brandenburg 5% Bremen 4.5% Hamburg 4.5% Hessen 5% NiederSachsen 4.5% Mecklenburg-Vorpommern 5% Nordrhein-Westfalen 5% Rheinland-Pfalz 5% Saarland 5.5% Sachsen 3.5% Sachsen-Anhalt 5% Schleswig-Holstein 5% (6,5% from 1 January 2014) Thüringen 5% This brief overview cannot replace individual tax and legal advice and may not be construed as such. Please keep in mind that RETT rates may change at any time and should be reviewed on a regular basis. Our tax department in Frankfurt is available to answer any queries you may have.

97 11 27 18 E: klaus.herkenroth@ashurst.

5 Contacts Dr Klaus Herkenroth Partner Rechtsanwalt, Steuerberater T: +49(0) E: Heiko Penndorf Partner Rechtsanwalt, Steuerberater T: +49 (0) E: Susanne Knoch Associate Rechtsanwältin T: +49 (0) E: Felix Krüger Associate Rechtsanwalt T: +49 (0) E:

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