Transparency register and real estate in Germany – excessive reporting obligations for foreign companies

The Federal Administrative Office has clarified that foreign companies must be reported to the Transparency Register even if they only indirectly hold shares in German real estate. The reporting requirement applies to all companies in the investment chain. However, only if their shareholding reaches a threshold of at least 90 percent.

The real estate market has long been considered by experts to be particularly vulnerable to money laundering. For this reason, the legislator is increasingly pursuing the goal of ensuring that it is comprehensible to whom real estate property is attributable.

Against this background, notaries were initially required to check whether the acquiring company is registered in the transparency register in the case of real estate purchase agreements. Insofar as this was not the case, the notary may not perform the notarization (prohibition of notarization).

In order to also cover foreign structures, reporting requirements for foreign companies were successively introduced. Until now, the latter were obliged to report their beneficial owners to the transparency register if they acquired ownership of real estate located in Germany directly or by way of a share deal.

Sanctions Enforcement Act II obliges foreign companies to report to the transparency register

With the Sanctions Enforcement Act II, reporting obligations for foreign companies to the transparency register have been further extended as of January 1, 2023.

The reporting obligation now also applies to foreign companies with existing real estate in Germany. This is subject to an implementation deadline of June 30, 2023.

This applies both to direct investments in real estate and to share deals in which shares in companies owning real estate were acquired in the past (acquisition transaction pursuant to Section 1 (3) or (3a) of the Real Estate Transfer Tax Act – GrEStG).

As a relief, the legislator has provided that a reporting obligation does not apply if the companies concerned have already transmitted the information on the beneficial owner to a register of another EU member state.

Clarification by the Federal Office of Administration dated May 5, 2023 on reporting requirements for indirect holdings in German real estate

As is so often the case, the new regulation raised various questions in practice, in particular whether only the foreign company in which the acquisition transaction pursuant to Sec. 1 (3) or (3a) GrEStG is or has been realized must be reported or whether all foreign companies in the chain of ownership are subject to a reporting obligation.

The Federal Administrative Office responsible for the Transparency Register has provided guidance on this issue in the FAQ newly published on May 5, 2023:

• According to the Federal Administrative Office, the transparency obligation extends to all foreign legal entities to which shares in a company with domestic real property are or (in the past) were directly or indirectly transferred.
• In the opinion of the authority, this means that even for existing properties
  all
  legal entities in the chain of shareholdings are subject to the notification obligation, insofar as they each individually meet the requirements of Section 1 (1) of the German Commercial Code. 3 or par. 3a GrEStG and meet the threshold of at least 90% of the shares.
• The principles of the Real Estate Transfer Tax Act apply to the determination of the directly or indirectly controlled shares in the company (i.e., in particular, calculating through the threshold of 90% at each shareholding level).
• In turn, this means that if foreign legal entities within the participation chain do not meet the requirements of Section 1 para. 3 or para. 3a GrEStG – here the threshold value of 90% is probably meant in particular – they are also not obliged to notify the transparency register.

Consequences of an incorrect or missing report to the transparency register

Non-compliance with the above-mentioned reporting requirements may result in substantial fines. According to the catalog of fines, these fines are based primarily on the company’s sales or balance sheet total and can amount to up to EUR 150,000 in the case of a first-time infringement. In case of serious, repeated or systematic violations, fines may increase up to EUR 1 million.

In addition, the law provides for “naming-and-shaming” in the case of final decisions imposing fines of EUR 200 or more – currently, more than 1,200 decisions have already been published.

From an economic point of view, it may be particularly critical that, due to the express prohibition of notarization in real estate transactions, a transaction may fail or, in any case, be significantly delayed if it is not reported to the transparency register or is reported incorrectly.

Conclusion

While this provides a certain degree of clarity on the one hand, on the other hand the legal understanding of the Federal Administrative Office creates a considerable burden for foreign groups of companies with German real estate holdings.