German property buyers pay
However, buyers do not pay the transfer tax when the transaction is registered as a Share Deal and not an Asset Deal. In such cases, the seller has previously registered the property to a company and is ready to sell the latter.
With a Share Deal, the buyer acquires 94% of the company at most, while the remaining 6% or more is transferred to a third party or kept by the previous owner. Otherwise, the transaction will be deemed an Asset Deal and the transfer tax will have to be paid.
In addition, the amount by which the property depreciates during an Asset Deal and Share Deal is calculated differently: this is what the profit tax base depends on.
In the case of an Asset Deal, the buyer can annually deduct depreciation expenses corresponding to around
Example: depreciation deductions during an Asset Deal
Having bought a property for €14M, where the building costs €10M, and the land plot costs €4M, the investor can annually deduct €300,000 (3% of €10M) as expenses.
With a Share Deal, the buyer can also deduct depreciation expenses from the profit tax base, yet not as a percentage of the share purchase price of the company, but as a percentage of the property book value: the property acquisition cost minus the accumulated depreciation. If the property is not
Example: depreciation deductions during a Share Deal
A legal entity bought a property for €10M in 2007. In 2017, the company itself sells for €14M. Over the ten years, the property has depreciated, and its book value now runs at €8.17M. After the purchase, the new owner will be able to calculate the depreciation not according to the price paid for the company (€14M), but from the property book value (€8.17M) and only during the remaining period of depreciation. The percentage of depreciation deductions and the depreciation period are established by law and depend on many factors, such as the property type and the year of construction.
Selling under the Share Deal scheme offers more opportunities for tax optimisation. “The owner finds it more profitable to sell a company, not a property. If a German corporate group sells its subsidiary, also registered in Germany, 95% of the profit goes untaxed. The remaining 5% is reduced by the amount of expenses incurred. As legal entity maintenance expenditures usually amount to at least 5% and are deductible, the sale tax is almost zero,” Yury Poryadochnov, Tax Advisor at Hecht, von Luxburg, says.
Example: buying expenses, depreciation deductions and the investment property sale tax in Berlin for a €14M transaction
|Expensesand deductions||Approximate amounts, EUR thousands|
|Share Deal||Asset Deal|
|Expenses related to property purchase||710||1,550|
|— notary and registration fees (1.5%)||210||210|
|— transfer tax (6%)||0||840|
|Annual depreciation deductions (3%)||245||300|
|Sale tax (after deduction)||0||214|
Therefore, registering the transaction as a company purchase is much more beneficial for tax optimisation purposes. However, the investors should take note that due dilligence is more complex in the case of a Share Deal. “The transaction implies a greater number of risks when buying a company. The legal entity itself has to be checked in order to identify outstanding or potential liabilities,” says Yury Poryadochnov.
The advantages and disadvantages of Asset Deals and Share Deals