New regulation of real estate transfer tax for share deals from the perspective of criminal tax law

The planned new regulations on share deals are extremely complex and will result in stricter taxation. But that’s not all: new challenges also arise from a criminal tax law perspective. These are due not only to the new legal provisions, but also to increased investigative activities by the tax authorities.

I. Task Force on Real Estate Transfer Tax at the Tax Investigation Office in North Rhine-Westphalia
Since the end of 2017, the tax investigation offices in North Rhine-Westphalia have already been conducting systematic pre-field investigations throughout Germany to uncover and identify unknown real estate transfer tax cases. To this end, a task force was initially set up at the Hagen Tax Office for Tax Criminal Matters and Tax Investigation, which uses publicly available data to evaluate M&A transactions and reorganizations of recent years to determine whether real estate transfer tax was triggered by share transfers or share unifications because at least 95% of the shares in a real estate-owning company were directly or indirectly transferred or combined. In the course of this, companies have been and are being investigated in the context of (tax) investigations pursuant to Sec. 208 para. 1 No. 3 of the German Fiscal Code (Abgabenordnung – AO) for information on identified transactions.
If it turns out that no real estate transfer tax has been declared and paid for such transactions, criminal investigation proceedings or fine proceedings pursuant to Sections 30, 130 OWiG are regularly initiated in addition to the taxation proceedings. Our experience shows that the tax investigation department places very high demands on the real estate transfer tax compliance processes.
In such cases, the managing directors of the (often foreign) acquiring companies face the accusation of having intentionally failed to file the real estate transfer tax notifications or failed to do so in a timely manner. In addition to the considerable personal risk of criminal liability for management bodies, considerable fines are regularly imposed in addition to the skimming off of the economic advantage – whereby the tax authorities regularly assume a flat interest rate of 0.5% per month on the tax claim.
In the meantime, due to the large number of cases, the Essen Tax Office for Criminal Tax Matters and Tax Investigation has also been entrusted with the investigation of such cases.
A further increase in inquiries – and thus possibly also in investigation and fine proceedings – is therefore to be expected.

II. planned new regulation of real estate transfer tax on share deals
If shares in corporations with German real estate are transferred in the context of share deal transactions, this generally triggers real estate transfer tax at the level of the parties involved in the share deal (Sec. 1 (3) GrEStG). To avoid this real estate transfer tax, so-called RETT blocker structures are sometimes used on the acquisition side. In simplified terms, in these cases the buyer acquires only slightly less than 95% of the shares (e.g. 94%) while an independent co-investor acquires the remaining 6% as a RETT blocker. This approach has been causing discussion in the political arena for years about a new regulation of the real estate transfer tax for share deals. As of January 1, 2020, these requirements are now to become law.

III. selected essential aspects of the new regulation
The relevant participation threshold is reduced from 95% to 90%. In the future, the purchaser of shares in a real estate-owning corporation must therefore acquire less than 90% of the shares (e.g. 89%) so that no real estate transfer tax (on 100% of the real estate value) is triggered. Under the current legal situation, a co-investor could acquire the remaining shares without incurring real estate transfer tax. However, the planned Section 1 (2b) of the German Real Estate Transfer Tax Act (GrEStG) will put a stop to this arrangement. This special provision for corporations holding real property is modeled on Section 1 (2a) of the German Real Estate Transfer Tax Act (GrEStG), which has existed since 1997 and applies only to partnerships. § Section 1 (2b) of the German Real Estate Transfer Tax Act (GrEStG) deems a transfer of real estate to a “new” corporation if at least 90% of the shares in the corporation are transferred to new shareholders within ten years.
§ Section 1 (2b) GrEStG will therefore in future cover both the sale of shares to two investors (e.g. 89% and 11%) described above and the “ordinary” share deal in which 100% of the shares in a company are transferred to a new purchaser. Previously, such a share deal triggered real estate transfer tax pursuant to Section 1 (1) of the German Commercial Code (HGB). 3 No. 3 or No. 4 GrEStG.
In addition, a large number of highly complex issues arise with regard to the planned transitional arrangements.
Against the backdrop of the criminal and regulatory risks mentioned at the outset, it cannot be assumed that the tax authorities will reduce their high requirements for real estate transfer tax compliance simply because the complexity of substantive real estate transfer tax law continues to increase. The tax authorities are likely to continue to assume that corporate transactions are only to be carried out in compliance with all applicable legal provisions and that the necessary expertise is to be maintained in Germany and abroad. In this respect, it is also significant that in the future the tax debtor and thus also the party subject to notification within the meaning of Sections 19, 20 GrEStG will change in the case of share deals. Previously, the tax was always incurred at the level of the contracting parties involved in the share deal (usually the acquirer of the shares), so that the management of the acquiring company was subject to notification. In the case of Section 1 (2b) GrEStG, however, the real estate transfer tax is incurred at the level of the company holding the real estate (target), so that in the future the management of the target must file the real estate transfer tax notification.

IV. Recommendation for action
Due to the change in the tax debtor in connection with a share deal, domestic legal representatives will increasingly become the focus of tax investigations in the future.
In the case of corporate transactions, buyer due diligence should ensure that the necessary real estate transfer tax notifications were made in the past, as otherwise there may be considerable financial risks (and possible fines). In the case of transactions and restructurings involving subsidiaries or grandchildren with domestic real estate, expertise in real estate transfer tax should be consulted in good time.
If a company discovers that the deadline for the real estate transfer tax notification has already passed, this does not change the basic obligation to file. At the same time, it should be carefully examined in these cases whether the land transfer tax notification can or should be structured at the same time as a voluntary disclosure exempt from penalties or fines.
If the case has come to the attention of the tax authorities before a report has been filed in due time, further correspondence with the authorities should be conducted with particular care. In the event of a (tax) inquiry by the tax investigation department pursuant to sec. 208 para. 1 No. 3 AO, it is still possible in principle to file the (late) notification pursuant to Section 19 GrEStG in such a way that it also fulfills the requirements of a voluntary disclosure exempting from penalties and fines.
We are at your disposal both for preventive advice with a view to a voluntary disclosure made as a precautionary measure as well as for defense in the context of already initiated preliminary proceedings together with our tax experts at KPMG AG Wirtschaftsprüfungsgesellschaft.

Please feel free to contact us with any questions you may have on these topics.