Germany levies taxes on the transfer of real estate under the Real Estate Transfer Tax Act (Grunderwerbsteuergesetz) (GrEStG). The importance of carefully pre-planning transactions involving real estate has increased since 2006. This is due to a constitutional amendment allowing the 16 German federal states to determine the real estate transfer tax (RETT) rate independently of one another. As a result, more than half of the states have raised their RETT rates. Brandenburg, Thüringen and Nordrhein-Westfalen have most significantly raised their RETT rate, all raising it from 3.5% to 5%.

RETT can be classified as a transaction tax, which is imposed when the ownership in real estate situated in Germany is transferred to another person or legal entity. For example, RETT is triggered on the conclusion of a purchase agreement or other agreement that grants a claim to the transfer of property (paragraph 1, section 1, GrEStG). RETT also applies if ownership in property is conveyed without the parties entering into any form of contract.

However, the GrEStG is not limited to the transfer of real estate. Under certain conditions, in the case of a partnership or company holding German real estate, RETT is also triggered if the partnership interests or company shares are directly or indirectly transferred to a third party. By these measures, German legislation tries to prevent tax avoidance schemes. The relevant provisions of the GrEStG distinguish between partnerships, which are proprietarily transparent from a civil law perspective, and companies, which are not transparent.

This article:

The direct or indirect transfer of interests in a partnership that holds German real estate to new partners, is deemed a taxable transfer of the partnership's real estate if both (paragraph 2a, section 1, GrEStG):

To determine whether the 95% threshold has been exceeded, all transfers to new partners within a period of five years before and after each transfer must be accumulated.

For examples of how this works in practice, see below, Direct transfer of interests.

A transfer takes place if the new partners take over the interests of a retiring partner or if new partnership interests are issued to new partners. Partners are considered to be new partners if they both:

However, repeated transfers of the same interests to new partners are not accumulated and are therefore free of RETT, as long as more than 5% of the total interests in the partnership are not transferred. For example, A holds 94% and B holds 6% in a partnership. A transfers his partnership interests to C, and C resells the acquired interests to D. Although 94% of the interests were transferred twice, these transfers are not accumulated and do not trigger RETT, because B as an old partner still owns 6% of the partnership interests.

Transfers of interests between existing partners are generally free of RETT.

95% of the partnership's total interests have been transferred to new partners within five years. Therefore, the transaction is taxable under paragraph 2a, section 1 of the GrEStG. The tax base is 95% of the regular tax base, because B still owns 5% of his interests (paragraph 3, section 6, GrEStG).

The transfer of A's interests triggers RETT (paragraph 2a, section 1, GrEStG). This is because both:

Therefore, in total, 95% of the interests have been transferred. The tax base is only 95% of the regular tax base, as B did not transfer his indirect participation in the S-partnership (paragraph 3, section 6, GrEStG).

Paragraph 2a, section 1 of the GrEStG only applies to partnerships. In contrast, paragraph 3, section 1 of the GrEStG applies to companies (that is, corporations) and theoretically also to partnerships (however, see below, Direct aggregation, Partnership interests).

The transaction is subject to RETT under paragraph 3, section 1 of the GrEStG, as after the transaction B aggregates 95% of the company's shares. Paragraph 3, section 6 of the GrEStG only applies to a transfer of partnership interests and not company shares. Therefore, RETT is calculated on a basis of 100% of the regular tax base, regardless of the fact that only 45% of the shares are transferred.

Partnership interests. The wording of paragraph 3, section 1 of the GrEStG covers the aggregation of both company shares and partnership interests, but in practice the provision only applies to the transfer of company shares. In relation to partnership interests, the Supreme Tax Court ruled that all partners in a partnership own the same stake in the partnership for the purposes of RETT, regardless of their capital contribution (judgment of 26 July 1995, Federal Tax Bulletin II 1995, p. 736). Under this ruling, even a partner holding 0% of the partnership's interests is attributed the same stake as a partner owning, for example, 99% or 100% of the interests. Therefore, a direct aggregation of the partnership interests is only possible if the second to last partner retires from the partnership and transfers his interests to the last remaining partner (resulting in the partnership being dissolved and the real estate directly transferred to the remaining partner, triggering RETT under paragraph 1, section 1 of the GrEStG).

For example, A and B each hold 50% of the interests in a partnership that owns real estate located in Germany. A transfers 90% of his interests (45% of the partnership's total interests) to B (see box, Transfer of shares, where the company is a partnership and A and B are partners). The transaction does not trigger RETT. The requirements of paragraph 2a, section 1 of the GrEStG are not fulfilled, as both:

In addition, the requirements of paragraph 3, section 1 of the GrEStG are not met. Although B owns 95% of the partnership interests, he does not aggregate 95% of the stake, due to the Supreme Tax Court's ruling (under which A and B each have a 50% stake irrespective of their capital contribution).

The transaction does not trigger RETT. Firstly, paragraph 2a, section 1 of the GrEStG only applies to partnerships. In addition, the requirements of paragraph 3, section 1 of the GrEStG are not fulfilled, as C only holds 90% of the shares of the parent company. As a level of 95% is necessary under paragraph 3, section 1 of the GrEStG, the parent company's shares in the subsidiary company cannot be indirectly attributed to C. Therefore, for the purposes of RETT, C only aggregates 50% of the subsidiary company's shares. It is irrelevant that C would economically own 95% of the subsidiary company's assets if the shareholding levels were multiplied.

The Supreme Tax Court's ruling (see above, Aggregation of company shares and partnership interests: Direct aggregation − Partnership interests) results in the possibility for taxpayers and advisers to transfer real estate free of RETT, if companies and partnerships are combined in certain structures.

Example 1. The Y-GmbH & Co. KG is a limited partnership owning German real estate, in which:

A is the only shareholder of the X-GmbH. A transfers 94% of the interests in the partnership and 94% of the shares in the X-GmbH to B. The remaining 6% of A's interests in the partnership are transferred to the X-GmbH (see box, RETT-free transfer 1).

Economically, B now owns 99.64% of the partnership's assets (94% plus 94% of 6%). However, the transaction does not trigger RETT because paragraph 2a, section 1 of the GrEStG is not fulfilled. This is because only 94% of the interests in the partnership were moved to new partners (the X-GmbH receiving the remaining 6% is an old partner). The 6% held by the X-GmbH cannot indirectly be attributed to B, as B does not own at least 95% of the shares in the X-GmbH. Therefore, the 6% is not considered to have been indirectly transferred to B.

Example 2. A is the only shareholder of a company (X-GmbH) owning German real estate. A sets up a limited partnership (Y-KG) with B, in which B holds 94% and A 6% of the interests. A then transfers 94% of the shares in the X-GmbH to B and the remaining 6% to the Y-KG (see box, RETT-free transfer 2).

Economically, B now owns 99.64% of the company's assets (94% plus 94% of 6%). The transaction does not trigger RETT, because the requirements of paragraph 3, section 1 of the GrEStG are not met. B only aggregates 94% of the shares in the X-GmbH. The 6% owned by the Y-KG cannot be attributed to B because, under the Supreme Tax Court's ruling (see above, Aggregation of company shares and partnership interests: Direct aggregation − Partnership interests), A still has the same share in the Y-KG as B (and therefore less than 95%).

Formally, it would even be possible to grant 100% of the interests in the partnership to B, as long as another independent partner remained. However, the tax administration may consider this as an abuse of the legal structuring options (section 42, General Fiscal Code (Abgabenordnung)).