CORPORATE Real estate structuring again at the end of the year?

On January 1, 2024, the German Act on the Fundamental Modernization of Partnership Law (MoPeG), published on August 17, 2021, will come into force. This modernization is associated with several changes or innovations that structuring practitioners should prepare for. Among other things, the MoPeG will lead to the abandonment of the so-called “Gesamthandsprinzip” [or principle of joint hands], the leading legal principle of direct participation of the shareholders in the partnership’s assets. On the other hand, the company’s legal personality is strengthened.

What does the abandonment of the principle of joint hands mean?

For a long time, it was not legally certain whether partnerships themselves or their partners “jointly and severally” owned the company’s assets. The concept of “joint and several ownership” was included by the German Civil Code legislator in Sections 718, 719, and 738 of the German Civil Code and provoked a myriad of academic treatises and writings on the nature of this legal concept, which was to play a significant role in partnership and partnership tax law (keyword “transparency principle” in income tax law).

After a long dogmatic tug-of-war, the Federal Court of Justice recognized the legal capacity of a civil law partnership participating in legal transactions (so-called external civil law partnership) in 2001. Further, it concluded that the external civil law partnership should be the owner of assets and the object of allocation for the company’s assets. However, the question of asset ownership remained controversial for a long time, and the tax law literature was still unable to come to terms with this idea.

In any case, the MoPeG now clarifies the civil/company law dispute with the stroke of a pen and, from 01.01.2024, enshrines the principle in Section 713 BGB nF that the contributions of the shareholders, as well as the rights acquired for or by the company and the liabilities established, become assets of the company. By abandoning the civil law principle of joint ownership of assets, the company (as with a corporation) is now clearly the holder of rights and, therefore, the owner. The shareholders are no longer entitled to them. They “only” have the company share. The parallels to the corporation are apparent; some people see this as paving the way for a uniform company/corporate tax law.

What effect does the abandonment of the joint ownership principle have on real estate transfer tax?

In current real estate transfer tax law, concerning Sections 5, 6, and 7 (2) and (3) GrEStG (German real estate transfer tax law), real estate transfer tax concessions apply to the transfer of real estate to or from a community of joint owners to the effect that no real estate transfer tax is levied if the transfer is made by or to parties who have an interest in the joint assets.

These regulations have practical significance in a variety of ways. To name just a few examples, you have to take into account, for example

succession planning, when properties are to be transferred to new beneficiaries who are to hold the property in a company (keyword family-owned partnership), or, in a commercial environment, properties that are part of particular business assets or not yet tied up in business assets are to be transferred to commercial partnerships, furthermore, structuring real estate fund companies, or, reorganization of corporate groups and groups of companies, transformation processes, or the dissolution or separation of companies and shareholder groups.

Given the current valuations of properties and the tax rates of between 5.0% and 6.5% levied nationwide, except in Bavaria, such direct or indirect ownership transfers are affected by considerable liquidity burdens from the real estate transfer tax without money necessarily flowing.

With the abolition of the joint ownership principle and thus the abolition of the conceptual and thus factual link to the exemption provisions in Sections 5, 6, and 7 (2) and (3) GrEStG, a situation arises which, contrary to the current legal situation, will make the transactions described above subject to real estate transfer tax from January 1, 2024. This possible outcome threatens to impose additional burdens in the millions on existing partnerships holding real estate.

As the current real estate transfer tax law is complex, particularly regarding the standards and application areas above, all parties involved should seek advice early this year if they plan to transfer transactions relevant to real estate in the next few years. Although some scholars still believe that the provisions mentioned above could continue to be applicable through an amended interpretation of the wording, this is associated with considerable risk, as the tax authorities must assume they will continue to apply.

How is the legislator reacting?

In June 2023, the Federal Ministry of Finance (BMF) distributed a discussion draft (dated 15.6.2023) on the amendment of the GrEStG to the associations, as the ministry itself sees a considerable need for adjustments to the topic of real estate transfer tax due to the adjustments to partnership law as a result of the MoPeG. In particular, in the opinion of the BMF, the exemption mentioned above provisions will be ineffective from 01.01.2024. According to the discussion draft, these standards will be replaced by new tax concessions for companies. The group clause is also to be amended.

As neither the opinions of the associations nor a proposal for an amendment to the real estate transfer tax has been submitted to the legislative process, those mentioned actual estate-related transactions will be subject to considerable risks from January 1, 2024. On the basis of the discussion draft and the current legal situation, we will be happy to advise you on the corresponding options for action and will also assist you in 2023 with the issue of preventive structuring.

Notaries face another hot, property-related fall in 2023, like last year!