Germany: Germany Introduces Reits – With A Major Defect?

Last Updated: 3 January 2007

By Dr. Florian Schultz and Dr. Herbert Harrer are partners of Linklaters, Frankfurt

In Germany, with the largest real estate market in Europe, the introduction of REITs has generated significant controversy. On 2 November 2006 the German government approved the draft law on German Real Estate Investment Trusts (G-REITs). On 15 December 2006 the German Lower House (Bundesrat) rendered a list of many suggestions for amendments. It is expected that the legislative process will be finalised by the end of March 2007, but nevertheless the Ministry of Finance announced that the law will become effective with retroactive effect as of 1 January 2007. The most exiting question: Will the final G REIT law exclude residential portfolios (as the current draft of the government does) or not (as the Lower House (and all important German real estate market participants) suggests). Residential portfolios account for a significant part of the German real estate market. In particular, private equity funds that are heavily invested in flats and residential housing portfolios had hoped for a successful exit using the G-REIT vehicle. Public authorities (cities and federal states (Bundesländer)) who have large portfolios had also hoped to be bale to enhance their cash position by sale through a G-REIT. Germany would be the only jurisdiction with such an exclusion, and thus partially lose the international competition for capital.

Due to uncertainty regarding timing, some other open legal questions and details in the structure realistically Germany will see the first G REIT IPOs after the summer break.

"Normal" Limited Stock Corporation

A REIT is a vehicle that invests in property and enjoys a measure of protection from corporate and trade tax. In return, the REIT has an obligation to distribute a significant amount of its cash flows to shareholders.

According to the government draft, German REIT stock corporations (REIT AG) will generally be unregulated stock corporations. Their business purpose is limited to the purchase, holding and sale of title of ownership and rights of use in rem to real estate in Germany and foreign countries, as well as the management relating to renting and leasing of such real estate and necessary ancillary services. All shares in the REIT AG must constitute a single class of ordinary shares with voting rights, issued against full payment of the issue price. The minimum nominal amount of stated capital is € 15 million.

At least 75 per cent of the total assets (valued at market value in the compulsory IFRS group accounts) of the REIT AG must be real property. Accordingly, the REIT AG may not hold more than 25 per cent of its assets in the form of participating interests. If these requirements are not fulfilled, or if the REIT AG will purchase a participating interest that will bring its total participating interests above the 25 per cent threshold, consideration must be given to sales or mergers within the group in order to achieve REIT status. However, such sales and mergers will generally trigger income and real estate transfer taxes. A further specified requirement is admission of the REIT shares to trading in an organised market on a stock exchange within the EU or the EEA. There will be no private REITs in Germany, a fact that greatly pleases the open-end and closed-end real estate investment funds.

Restricted Shareholder Structure

Direct shareholding of 10 per cent or more of the shares of a REIT AG is not permitted. This rule is designed to avoid the application of reduced withholding tax rates for foreign investors under many double-taxation treaties. The REIT AG’s free float must be 25 per cent initially and at least 15 per cent thereafter. For the first time, "free float" has been legally defined as the shares of shareholders who each hold less than 3 per cent of the shares . Contrary to preliminary deliberations, the current draft law does not provide for corporate-law sanctions and only tax sanctions are imposed. The shareholder-structure limitation is therefore regulated on a pragmatic basis. One interesting aspect of the law is the future economic significance of G-REIT free-float shareholders: they are the prerequisite for maintaining REIT status and will therefore not be disappointed to have been granted such a relevant position.

New Exit Tax Regulation

As a related measure, an exit-tax provision will be incorporated into income tax law. This provision will be applicable only during a three-year period ending 1 January 2010. Under this provision, a tax privilege will result if hidden reserves are realised for real estate assets held over a period of more than ten years as fixed assets of German property upon conversion into a G-REIT or upon sale to REITs, to preliminary REITs and (for reasons of equal treatment) to open-end real estate investment funds with private unitholders. In essence, only 50 per cent of the hidden reserves will be subject to taxation.

Fortunately, this privileged taxation also applies to sale-and-leaseback structures. This makes the G-REIT interesting for hotels, department stores and hospitals, infrastructure projects, etc. Sellers are likely to favour G-REITs and open-end real estate funds for future real estate transactions over foreign REITs, foreign investment funds and German companies without REIT or preliminary REIT status, for example, closed-end real estate investment funds. It may be argued that the ten-year time limit is too long or the three year time limit too short and that the group of privileged purchasers is too narrow. However, the new law’s exit tax provison is very likely to give significant impulse to the German real estate market.

The REIT AG itself will be completely exempt from corporate tax (Körperschaftsteuer) and trade tax (Gewerbesteuer). No privileges at all are envisaged with respect to property tax (Grundsteuer) and real estate transfer tax (Grunderwerbsteuer). Fortunately, beside the exit tax in case of existing hidden reserves there will be no entry charge on the fair market value of the REIT real estate assets like in the UK.

Taxation at Shareholder Level

As opposed to taxable stock corporations, the REIT shareholders must pay the full amount of tax on the high distributions (distribution of 90 per cent of the profit of the REIT AG is compulsory). Profits will be calculated on the basis of the individual accounts to be drawn up according to the German Commercial Code (Handelsgesetzbuch - HGB). Optionally, straight-line depreciation may be excluded.

An important aspect for foreign shareholders is a withholding tax of 25 per cent on the distributions, which can be reduced to 15 per cent in accordance with many double-taxation treaties. The latest amendment to the double-taxation treaty with Ireland even grants a reduction to 10 per cent; Ireland will probably become a very interesting holding jurisdiction for G-REIT investors. This shows that amendments to important double-taxation treaties are part of a functioning G-REIT system. Unfortunately, this has been neglected in past years. This is not changed by the equal standing with non-German REITs that the draft statute surprisingly envisages for reasons of equality of opportunity. In any event, German investors in non-German REITs must expect considerable tax increases on their investment returns.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions