Share deals increase in Germany as land transfer taxes rise

A growing number of investors are turning to tax-free share deals in Germany to get around higher land transfer taxes being imposed by debt-laden federal states.

North Rhine-Westfalia is a record-holder in many ways. With 17.5 million people, it is the most populous of the 16 German federal states. And with €138 bn in liabilities, it is also the most indebted. In 2014, the coalition of Social Democrats and Greens in control in the state capital of Düsseldorf added another €3.2 bn to the pile of debt. This year, they plan to limit new borrowing to €1.9 bn. To achieve that goal, the state government has hiked the land transfer tax, or Grunderwerbsteuer, to 6.5% from the beginning of this year.

It is the highest tax rate since Berlin rendered control of the Grunderwerbsteuer to the states in 2006. With the exception of Bavaria and Saxony, all the states have since increased the tax from the previous nationwide level of 3.5% to a range between 5% and 6%. However, North Rhine-Westfalia is not alone at the top with its new rate of 6.5%. Tiny Saarland has also raised the tax to this level from the start of 2015 while the northernmost state of Schleswig-Holstein had introduced the new record tax rate already in 2014.

There is more to come, experts believe. 'States are not done with raising the Grunderwerbsteuer,' says Carsten Rieckhoff, head of research at Engel & Völkers Commercial in Hamburg. All are scrambling to meet the debt brake enshrined in the constitution in 2011. From 2020, the individual federal states will not be allowed to increase their borrowing any further, forcing many to start tightening their belts in the years ahead. In order to bolster their finances a growing number of state governments are considering raising the land transfer tax even further – for one simple reason: 'It is the only tax the states collect in full and have full control over,' explains Günter Vornholz, professor of real estate economics at the EBZ Business School in Bochum.

Tax-free loophole
However, there is a way to get around the Grunderwerbsteuer and a growing number of investors are using this loophole. 'More and more property is being acquired through share deals instead of asset deals,' says Lutz Aengevelt, managing partner at property consultancy Aengevelt Immobilien in Düsseldorf. In a share deal, the property falls under the umbrella of a commercial partnership. With a sale, only shares of that legal entity change hands. Since the property remains within the partnership, no land transfer tax is due.

Before control of the Grunderwerbsteuer was handed over to the states in 2006, share deals where almost unknown in the German property market. That has changed as most states have resorted to raising the tax steadily in subsequent years. In 2013 alone, some 20% of all property acquisitions in Germany where carried out through share deals, according to Aengevelt Research.

The proportion was even higher in sought-after markets. 'In Berlin share deals accounted for 22.5% of all transactions in 2013 and in Frankfurt they represented as much as 32.6%,' says Aengevelt. Although the transaction data for last year have not yet been crunched completely, the figures available so far ‘point to a further increase in share deals in 2014,' adds Markus Schmidt, head of research at Aengevelt Immobilien.

Further growth forecast
This year, especially following the tax hikes in North Rhine-Westfalia and Saarland, the proportion of share deals is expected to grow further. 'The higher the tax rate, the more it offsets the legal and accounting fees that come with setting up a partnership for a property,' explains Andreas Trumpp, head of research at Colliers International in Munich.

In 2010, when the Grunderwerbsteuer averaged just 4.5% across all the states, share deals where only profitable for transactions exceeding €100 mln. 'Now, sellers and buyers alike come out ahead for deals of just €20 mln,' says Schmidt. While the seller has to pay for setting up the partnership, he is rewarded with a higher sale price for the property. 'Investors are willing to pay more for real estate in a share deal since they are spared the Grunderwerbsteuer,' says Schmidt. 'It is a win-win situation for both parties.'

A prime example of share deals in the low two-digit million range was set by WCM Beteiligungs- und Grundbesitz last year. The Frankfurt-based real estate company acquired four commercial properties in Berlin, Bonn, Düsseldorf and Frankfurt for a total sum of €107 mln – all in share deals.

Richard Haimann
German Correspondent

For more on the prospects for the German market, see the article and video presentation from the Outlook 2015: Europe & Germany investment briefing.