Upcoming German Tax Law Changes Relevant To Real Estate Investments

On 1 August 2018, the German Ministry of Finance published the amended draft bill of the Annual Tax Act 2018 which will be subject to further discussions in the parliament in the coming months.

Furthermore, the States' Ministers of Finance have agreed on the key points to reform the real estate transfer tax with a view to reducing tax avoidance schemes in relation to share deals. On the basis of the Ministers' proposal, the German Ministry of Finance is expected to issue a draft law before year-end.

What are the proposed tax measures? And what will be the impact on German real estate investments made via Luxembourg? We answer these questions in our Tax Alert.

Annual Tax Act 2018

Amongst other things, the draft bill comprises the following key points in relation to investments in German real estate:

Capital gains on the sale of shares in property- Capital gains on the sale of shares in property-rich companies rich companies rich companies Currently, non-residents selling shares in property-rich companies are only subject to German taxation if the company sold has its registered seat or place of effective management in Germany. A company is considered as property-rich if, at any point in time during the 365 days preceding the sale, it derived more than 50% of its value (directly or indirectly) from German immovable property.

The draft bill extends Germany's taxation right to the sale of foreign property-rich corporations and shall only apply to sales and increases in value after 31 December 2018. Accordingly, when a Luxembourg company sells another Luxembourg company that owns German real properties, capital gains realised upon disposal would be taxable in Germany under the new tax rules.

However, the impact of this tax law change should be limited for institutional investors. German tax law provides for a 95% exemption on capital gains realised upon disposal of a participation (under certain conditions). This exemption would also apply in cases where a Luxembourg company sells a Luxembourg property company with German real properties.

In practice, such capital gains should even benefit from a full tax exemption. Based on case law of the German Federal Tax Court, non-resident companies selling shares in German resident companies may benefit from a full exemption. This case law should also apply to the cases captured by the extended scope of the draft bill.

Capital gains on the disposal of German real properties The draft bill comprises a key...