Real estate transfer tax – optimisation and risks of acquiring a property developing company

published on 21 July 2023 | reading time approx. 3 minutes

The transfer of shares in companies that buy, develop, and resell real estate (property developing companies) has been made significantly more difficult due to the so-called "Share Deal Reform" of the Real Estate Transfer Tax Act ("GrEStG"), effective 1 July 2021. Furthermore, the real estate transfer tax in such cases can be assessed based on the future value of the finished developed property. However, if the buy- and sell-sides are willing to jointly participate in the project during a transitional period, these problems can be alleviated.

Well meant is not always well done: In their efforts to close tax gaps, the legislators usually overshoot the mark. In extreme cases, an excessive tax burden can threaten the existence of a healthy company being transferred, in this case a medium-sized property developer.

A case example

The exampled company having the legal form of a limited liability company buys land, builds residential houses on it and sells them on after about three years. For reasons of age, the existing shareholder ("E") is looking for a successor ("S") to take over and continue the company including its employees. One thing is clear: If at least 90% of the shares are transferred to new shareholders within 10 years, real estate transfer tax will be due in accordance with Sec. 1 para. 2B GrEStG.

Problem: Higher tax base

What is dramatic, however, is the amount of real estate transfer tax. This is because it is not only determined based on the value of the real property at the time of the assignment of the share, but it rather covers the value that the building being or yet to be constructed will have after it is completed. In this respect, the Real Estate Transfer Tax Act is stricter than, for example, the inheritance tax, where the value is assessed proportionately to the progress of construction.

This is based on the concept arising from Sec. 8 para. 2 sentence 2 GrEStG, which is reasonable in itself, that a buyer no longer buys an "empty" plot of land if the previous owner had already made a plan to build on it. In the case serving as the example, however, this leads to a situation where, for the sale of the property developing limited liability company, a fiction is assumed for real estate transfer tax purposes that the company has already completed all construction projects. In terms of calculating the tax, therefore, real estate transfer tax is payable twice on the later sale price. The real estate transfer tax on the transfer of shares is tax-deductible, so the payer may enjoy an income tax relief. But the real estate transfer tax significantly exceeds the income tax relief. In addition, the real estate transfer tax leads to an immediate outflow of liquidity, whereas the income tax relief can be actually taken advantage of only with delay, after the tax assessment for the year concerned. Thus, due to the tax rates of up to 6.5 percent and the fact that the tax burden may arise many years before the real property is sold to the end customer, the real estate transfer tax poses a real liquidity problem for the company, not to mention the value reduction in the case of the company acquisition.

Joint participation as a solution

Given such ancillary costs, the company's successor S may no longer be in such a hurry to take over the entire company and this offers structuring opportunities. If less than 90 percent of shares are purchased, the investment will not be subject to real estate transfer tax. E and S can therefore complete the current projects with this share ownership ratio without incurring real estate transfer tax. The prerequisite for this is the full-fledged participation of the minority shareholder, which may also not be legally or economically impaired, for example through disproportionate profit distribution or an already scheduled later pur-chase/sale of the remaining shareholding.

If E finally wants to withdraw from the company after a few years, the old projects sold by then are no longer part of the real estate assets of the property developing limited liability company and the share purchase is not subject to real estate transfer tax.

The situation is completely different for new projects acquired in the meantime: Due to his shareholding, S has already the status of an "existing shareholder" for real estate transfer tax purposes; the transfer of the remaining shares held by E, therefore, does not lead to the fulfilment of the criteria of Sec. 1 para. 2b GrEStG even within the 10-year period. If S wants to buy the shares himself and increase his shareholding to 100 percent, the transaction is taxable as a share consolidation under Sec. 1 para. 3 GrEStG; however, as a rule, the tax is assessed only on the basis of the value at the time the criteria are fulfilled, i.e. proportionally to the degree of completion of the buildings. A taxable share consolidation will not even take place at all if E sells his shareholding to a third party and S continues to hold less than 90 percent of the shares.

Hint: Open communication with the tax office

Apart from that, it is recommended to maintain transparent communication with the tax office about the transfers and agreements. In the case serving as example, the transaction could be non-taxable at all, so there might be no formal obligation to notify the real estate transfer tax office. In practice, therefore, there are often misunderstandings and queries on the part of the authorities, for example, due to a notarial deed on the transfer of shares sent without comment. It is therefore advisable to provide a brief description of the facts, if necessary including the description of accompanying agreements such as a purchase option. In the case of a poorly structured transaction, this can also be the lifeline: a real estate transfer tax notification sent in a timely manner within two weeks after signing the notarial purchase agreement is necessary for a (partial) reversal of the transaction to at least eliminate the real estate transfer tax.