Key drivers for the elevated relevance of the so-called “Co-Possession Funds” are the present uncertainties of an upcoming reform of the German regulation on partnerships (“MoPeG”) as of 2024 for German actual property switch tax remedy. This construction might be a lovely various for structuring the contribution of actual property right into a fund resolution in Germany, for each financial and tax causes.
1. Introduction / set-up of a Co-Possession-Fund
In response to German regulation, a German open-ended actual property particular fund (Immobilien-Sondervermögen) can typically be structured in two methods: (1) the actual property might be legally owned by the funding administration firm on behalf of the actual property particular fund/its traders (so-called “trustee resolution”) or (2) by the actual property particular fund’s traders themselves (i.e., within the case of a single investor, possession or title in the actual property or different property stays with the only investor – the so-called “Co-Possession-Fund” – Miteigentumsfonds).
The Co-Possession-Fund can be utilized as a fund car for the optimization of German actual property held by (institutional) traders on their steadiness sheet immediately.
For the set-up of a Co-Possession-Fund, the investor contributes (German) actual property (and, for instance, fixtures or shares in actual property holding corporations) to the Co-Possession-Fund. “Contributes” means on this respect that solely the only energy of disposal (Verfügungsmacht) with regard to the actual property might be transferred to the Co-Possession-Fund’s funding administration firm. The authorized possession of/title within the contributed actual property stays with the investor (i.e., there isn’t any authorized change of possession/title within the land register). In return, the Co-Possession-Fund’s funding administration firm points shares within the Co-Possession-Fund to the investor, of which the worth is set primarily based on a valuation of the contributed actual properties. There isn’t any capital stream required for such contribution transaction.
With regard to German company earnings tax (“GCIT” – Körperschaftsteuer) and German commerce tax (Gewerbesteuer) (if relevant) a disclosure of hidden reserves of the actual property will happen upon contribution, which typically triggers an earnings taxation of these (latent) capital good points. Nonetheless, for tax-exempt traders similar to German occupational pension schemes, the contribution of the actual property gained’t be topic to German company earnings tax nor German commerce tax primarily based on their particular person tax-exempt standing.
Furthermore, in line with a ruling of a decrease fiscal court docket in 2016, the contribution of actual property to the Co-Possession Fund doesn’t set off German actual property switch tax (“RETT” –Grunderwerbsteuer) which has been the certified tax place of King & Spalding since 2010. Nonetheless, provided that there was no remaining choice of the German Federal Fiscal Courtroom (Bundesfinanzhof) as the very best fiscal court docket in Germany and no official round or decree has been issued on this regard by the German Ministry of Finance but, there stays a sure residual threat.
2. Advantages of a Co-Possession-Fund
The Co-Possession-Fund can be utilized as an acceptable instrument to leverage hidden reserves of the contributed actual property for steadiness sheet results, make the most of obtainable and accrued tax loss-carried forwards, bundle actual property (for instance: switch from investor’s “personal steadiness sheet”) and carry out a clear and up-to-date valuation of those actual property property. By transferring the only energy of disposal with regard to the contributed actual property to the funding administration firm, the investor’s asset administration duties (for instance: tenant administration and so forth.) might be outsourced to the funding administration firm and thus keep the investor’s personal assets. Furthermore, ought to a substitute of the funding administration firm be required for no matter motive, no German RETT might be triggered. Different advantages can embody, for instance, flexibility in distributions primarily based on the relevant fund calculation schemes or a possible use for compensation in relation to destructive efficiency of different investments of the investor.
3. Potential structural benefit of a Co-Possession-Fund on account of modifications in German regulation on partnerships as of 2024
In comparison with the authorized construction of the German funding restricted partnership (Funding-Kommanditgesellschaft) which is often used as a closed-end fund entity to pool actual property, we at the moment see an necessary benefit with the Co-Possession-Fund mannequin:
Because of nonetheless lacking and —from our perspective —clearly required modifications in German tax legal guidelines to forestall (unintended or meant) detrimental tax results by the reform of the German regulation on partnerships as of January 2024, this new authorized framework might have a large affect on the RETT remedy as a result of new recognition of authorized capability for the partnership itself, which implies that it could actually maintain property in its new capability and such property are not thought-about “joint property of the companions” (Gesamthandsvermögen). Below the present RETT system, precisely this technique of the Gesamthandsvermögen permits an final launch from a RETT burden on the contribution of the contributed actual properties if the traders keep throughout the partnership for at the very least ten years with their preliminary curiosity holding in that partnership (necessary holding interval).
Thus, with out an adjustment of German tax regulation in due time, the contribution of actual property of an investor to a German funding restricted partnership probably will set off actual property switch tax as of January 2024, even when the investor had owned the actual properties earlier than and already holds 100% of the pursuits within the funding restricted partnership.
Whatever the above talked about present RETT uncertainties, the Co-Possession-Fund might be a lovely various for structuring the contribution of actual property in a fund resolution in Germany for each financial and tax issues. This funding instrument is relevant with out restrictions each to home and international traders.