Why does the law of reducing returns apply

Law complicates tax tricks when buying real estate

In February, the case caused a stir not only in Saarland, but also nationwide: Research by SR and Correctiv uncovered real estate transactions in Ottweiler and elsewhere in Germany, in which international investors on the one hand use all possible legal tax tricks to increase returns to optimize.

At the same time, they cared comparatively little about the tenants, who in Ottweiler, for example, had to live with serious deficiencies for months. At least 2000 apartments nationwide were affected by the tax tricks, and according to research by SR and Correctiv, the damage to the German state runs into the millions.

The state tries to put a stop to "share deals"

A legal tax trick that has just been used extensively in Ottweiler and other places should no longer be possible in the future. According to information from SR and Correctiv, the Finance Committee of the Bundestag on Wednesday spoke out in favor of a legal reform intended to curb “share deals”, ie the targeted evasion of the real estate transfer tax through share purchases.

Video: Share Deals explained
Video: Share Deals explained

The Bundestag could adopt the changes as early as next week. The new law is due to come into force on July 1st of this year. After the tightening of the law was a hangover for years, everything should suddenly go very quickly.

Real estate deals like the one in Ottweiler would be prohibited in the future

For Christoph Trautvetter from the Tax Justice Network, the amendment to the law comes too late and is “too hesitant to completely eliminate the injustice in the system.” Nevertheless, he speaks of progress: “In the future, the agreement will prohibit the most absurd and most widespread sharing Deal model ".

This also applies to real estate transactions such as in Ottweiler. Research by SR and Correctiv had shown that the owner company, the "Residential Value West 1" including real estate holdings, had been resold several times without real estate transfer tax flowing into the state coffers.

The entire company always changed hands, in two "shares". The apartments are now part of a fund run by the US financial investor KKR, which acquired “Residential Value West 1” a few months ago. A subsidiary founded especially for this purpose in Luxembourg bought 94.9 percent, another subsidiary 5.1 percent. Since this is not a real estate purchase in the original sense, no real estate transfer tax was due.

This will no longer work in the future, emphasizes Trautvetter: “One hundred percent of the company shares change hands at the same time and are bought by two companies. This type of share deal is banned by the new law ”. If such a purchase is made in the future, says Trautvetter, the company must report this to the German tax office. And then also pay the real estate transfer tax.

From Caribbean trusts and large real estate funds
Video [SR.de, (c) SR, 02.03.2021, length: 21:05 min.]
From Caribbean trusts and large real estate funds
Saarland rents flow via detours to the British Virgin Islands. The international investors use all possible tax tricks to get the maximum profit. The tenants fall by the wayside. Niklas Resch from the SR research team shows how information from citizens can lead to important insights for society.

Threshold falls to 90 percent - loophole remains

The law also provides for further changes. In the future, real estate companies will have to hold shares in their possession for ten years instead of five. Only then can the shares be sold tax-free to the major shareholders.

Another adjustment in the new law: The threshold for share deals is to be reduced, from currently 95 to 90 percent. Specifically, this means that if more than 90 percent of the shares in a company that owns real estate are sold in the future, real estate transfer tax will also be due.

Lowering the threshold has been an issue in the legislative process for a very long time. "Many real estate companies have therefore adapted in advance and now only hold shares of just under 90 percent in the real estate," says real estate expert Christoph Trautvetter. In the event of a sale, no real estate transfer tax will then still be due. At least if the remaining shares are not sold at the same time.

SPD dissatisfied with compromise

The agreement also took so long because the SPD would have liked to lower this threshold to 75 percent. A compromise was reached at the end of March, announced Lothar Binding, financial policy spokesman for the SPD parliamentary group. The current agreement is "annoying because the better proposal could not be compromised."

The SPD does not see that every normal citizen has to pay real estate transfer tax, but that the sale of a company with a property or building should, under certain circumstances, remain tax-free. Binding writes that reporting on share deals, including by Correctiv and SR, helped in the first place to make this compromise “a majority”. Often people can not imagine the tricks with which it is possible to avoid taxes. ”The Union did not comment on request.

Reduction of share deal deals
Audio [SR 3, Niklas Resch, April 14th, 2021, length: 04:08 min.]
Reduction of share deal deals

Left: private individuals pay the bill for the corporations

So far it has been like this: When private individuals buy a house or an apartment, real estate transfer tax is due, there is no getting around it. This varies from state to state, between 3.5 and 6.5 percent of the purchase price, as in Saarland.

Friedrich Staetmanns from the Left parliamentary group in the Bundestag believes that the current regulation means that private individuals help ensure that large investors can avoid the tax. He is annoyed about the content of the agreement. “Real tax fairness is not achieved in this way. From my point of view, there are still too many loopholes as to how real estate companies can still avoid the real estate transfer tax. "

Greens: "Surrender to the property lobby"

Lisa Paus, the financial policy spokeswoman for the Greens in the Bundestag, takes a similar line. Your party would have preferred a “proportionate model”, such as that prescribed in the Netherlands for real estate companies. If around 50 percent of the shares change hands there, 50 percent of the real estate transfer tax is due.

From Paus' point of view, the change in the law is a "surrender to the property lobby". After years of deliberations on the subject, an old draft of the federal states is now being adopted, which has been "watered down by exceptions for listed companies". Paus is annoyed that the share deals do not apply retrospectively. The real estate lobby has benefited twice from the long back and forth. In the meantime, investors have been able to avoid the real estate transfer tax. In addition, the new law also offers loopholes.

Billions in losses for the German state

Christoph Trautvetter from the Tax Justice Network also emphasizes the losses for the common good: "In recent years, the German state has lost large sums of money through share deals." Germany is around one billion euros.

Since, according to Trautvetter, changes to the law have been discussed for around ten years, the German state has now probably lost around ten billion euros.

Cautious optimism among tenants in Ottweiler

Back to the block in Ottweiler and the possible effects of the change in law for tenants. The real estate transfer tax should be due at the next sale. That makes speculating in real estate more difficult and less attractive. Because the next buyer would have to pay 6.5 percent on the purchase price.

That should ensure that the current owner, the fund of the financial investor KKR, who only acquired the real estate package a few months ago, does not sell it again so quickly - and possibly takes better care of the deficiencies on site, such as the ailing condition of some Building.

The tenants are cautiously optimistic anyway. Shortly after the first report in February, the new owner informed the tenants in Ottweiler that a renovation concept was being drawn up. Tenants have confirmed to the SR that employees were actually on site in order to at least document the gross deficiencies.

Nothing fundamental has yet been fixed. The tenants still have hope that the new owner will act soon. And it is much faster than politics in changing the property tax law.

The SR radio news reported on this topic on April 14th, 2021.