Real estate purchase in Germany by means of share deal
Opportunities and risks of the real estate share deal under german law
The purchase of real estate by means of a share deal (share purchase and transfer agreement) as such does not actually exist under german law. After all, real property can only be acquired by conveyance and entry in the german land register (land purchase agreement). The "real estate share deal" is therefore not a land purchase according to german law, but the purchase of shares in a partnership or a corporation. The special feature is that the company often only holds a plot of land and has no other significant assets (property company). This results from the fact that investors, for the purpose of risk reduction, often purchase real estate by means of separate subsidiaries, manage it and then offer it again on the market.
As a law firm specializing in german corporate and real estate law, we advise clients nationwide on commercial real estate transactions from a legal and tax perspective.
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Evasion due to the burden of real estate transfer tax
Every real estate purchase contract triggers real estate transfer tax. According to standard contractual practice in Germany, the resulting tax burden has to be borne by the purchaser of the real estate. Over the years, numerous federal states have made use of the option to increase the real estate transfer tax, which was originally set at 3.5%. This leads to a real estate transfer tax burden in Germany of up to 6.5%.
Investors have sought alternative arrangements in order to avoid the additional burden of real estate transfer tax under german law. This has met with a negative response in the recent past, prompting politicians to take action. A real estate transfer tax reform is now planned which will raise the thresholds for the tax permissibility of a share deal. For example, a tax-free acquisition by an investor and a "brought along" co-investor is to be made more difficult.
Against this background, any decision for or against a real estate purchase via share deal requires in-depth tax law advice in order to avoid (cost-related) surprises in german practice.
Additional expense due to due diligence under german company law
Not to be underestimated is the additional effort that arises from the fact that not just a property is examined and acquired (real estate due diligence), but a company that theoretically may have entered into an infinite number of rights and liabilities. The resulting legal and tax due diligence costs can be substantial. Therefore, the buyer must be aware that he is potentially taking significantly higher risks than when purchasing a property. Therefore, it is not advisable to opt for the share deal lightly for the purpose of a short-term profit (tax savings).
Notarization - yes or no, and if yes, what exactly has to be notarized in Germany?
As already explained above, real estate is often held in so-called special purpose companies, which only hold this one piece of real estate. In addition to the (very) frequently used limited liability company, partnerships can also be considered as company forms in german practice.
German corporations (especially limited liability companies)
The sale and transfer of GmbH shares must always be notarized in Germany. In the german real estate industry, the question arose for many years as to whether a shareholders' resolution to be notarized was also required for real estate transactions in the case of the GmbH and partnerships in corresponding application of Section 179 a of the German Stock Corporation Act (AktG).
There was a risk that a purchase agreement without such a resolution would be invalid, with the consequence that the transfer of ownership (asset deal) / the acquisition of shares (share deal) could be reversed).
There was also a risk of liability on the part of the acting representative of the company, for example in the case of a GmbH managing director, so there was a threat of personal recourse on account of acting without power of representation (Section 179 of the German Civil Code (BGB)) and the associated liability for damages on the part of the managing director.
Fortunately, the German Federal Court of Justice (BGH) clarified in 2019 that Section 179a AktG does not apply by analogy to corporate forms other than german stock corporations. This also leads to a saving in notarization costs, which was previously the safest way to notarize the consenting shareholder resolution in Germany.
Of course, the decision must not be understood to mean that a shareholders' resolution as such is no longer required. According to general principles of german corporate law, the sale of a company's only asset will always require a prior shareholders' resolution, and this is frequently also expressly stated in articles of association. Managing directors are therefore well advised to obtain the consent of the partners here for the purpose of reducing liability.
Partnerships in Germany
It is not uncommon for real estate in Germany to be held by limited partnerships, especially in the form of a GmbH & CO. KG, are held. Sometimes one also encounters the real estate partnership (GbR). In principle, the purchase of shares in a GbR holding real estate does not require notarization in Germany. The same applies to a limited partnership, unless the partners have agreed otherwise in the partnership agreement.
The situation is different for a GmbH & Co. KG. If a limited partner who is also a shareholder of the general partner GmbH sells his limited partner's share and his GmbH share, the purchase agreement must be notarized in its entirety. In german practice, the situation is different again in the case of the so-called "unitary company". This is the term used for a GmbH & Co. KG, in which the limited partnership is the sole partner of the general partner GmbH. In this way, the limited partner's shares - and thus, from an economic point of view, the property - can be sold and assigned without notarization in Germany.
Drafting of the contract under german law
In principle, the contract is drawn up in the same way as for the purchase of a company. A special feature is that the share purchase agreement contains detailed information on the acquired property, its condition, development and rental status. Frequently, especially in the case of the acquisition of commercially leased properties, share purchase agreements contain provisions regarding a minimum rent guaranteed by the seller or conditions precedent which are intended to ensure that the buyer acquires the property at a certain stage of development / at a certain occupancy rate.
For more information on relevant real estate topics in german practice, please visit the following pages of our law firm on the Internet:
- COMMERCIAL REAL ESTATE TRANSACTIONS
- REAL ESTATE PURCHASE AGREEMENT; LAND PURCHASE AGREEMENT
- COMMERCIAL LEASE LAW
- REAL ESTATE RELATED CORPORATE LAW
- REAL ESTATE AND TAXES