1 “Initiative Finanzstandort Deutschland“ (www.finanzstandort.de).Google Scholar

2 German general elections took place in September 2006, resulting in a change of government.Google Scholar

3 Entwurf eines Gesetzes zur Schaffung deutscher Immobilien-Aktiengesellschaften mit börsennotierten Anteilen (Draft of an Act introducing German Real Estate Stock Corporations with listed shares), dated 2 November 2006, available online at: http://www.bundesfinanzministerium.de/lang_de/nn_82/nsc_true/DE/Aktuelles/Aktuelle__Gesetze/Gesetzentwuerfe__Arbeitsfassungen/007,templateId=renderPrint.html (last visited 22 December 2006)Google Scholar

4 Art. 7 of the bill. The G-REIT Act will be published in the Bundesgesetzblatt (German Federal Law Gazette).Google Scholar

5 E.g. US-“REITs” (since 1960), Dutch “Fiscale Beleggingsinstelling” (“FBI”, since 1969), Australian “Listed Property Trusts” (since 1971), Canadian “REITs” (since 1994), Belgian “Société d'Investissement à Capital fixe en Immobilière” (SICAFI, since1995), Japanese “J-REITs” (since 2001), South Korean “K-REITs” (since 2001), Singaporean “S-REITs” (since 2002), French “Sociétés d'Investissement Immobiliers Cotées” (“SIIC”, since 2003), Hong Kong “H-REITs” (since 2003), British “Property Investment Funds” (“PIF”, starting 2007).Google Scholar

6 E.g. the “Deutscher Mieterbund” (German umbrella organization of tenants - DMB, www.mieterbund.de).Google Scholar

7 See the purpose of a G-REIT Act under A. I. of the bill's explanatory statements.Google Scholar

8 There is a total estimated real estate reservoir of about 7,200 billion €. So far, only a very small fraction of it – valued approximately 400 billion € – is held by institutional investors. The value of real estate held by other companies is estimated to be 1,500 billion €. About 73% thereof is owner-occupied commercial real estate, e.g. production sights, office buildings etc. In comparison, British companies occupy only 54% of their real estate assets, and in the US the respective figure is only 25%. By far, the lion's share of German real estate is owned by private individuals (approx. 5,300 billion €), see A. I. of the bill's explanatory statements.Google Scholar

9 If not stated otherwise, quotations within this essay refer to the regulations of the bill.Google Scholar

10 Specifically, the G-REIT may not engage in trading real estate; the bill considers as trade if the G-REIT has, within five years, gross revenues from the sale of real estate which exceed 50% of the value of the average holdings of real estate within the same period, Section 14.Google Scholar

11 Real property may be located in or outside Germany.Google Scholar

12 The exception of appartments built before 1 January 2007, so called “Bestandsmietwohnungen“, has been most recently included into the bill as concession to opponents of the G-REIT Act who fear that profit maximizing G-REITs will raise rents and reduce tenant protection to a minimum; however, this exception and its argumentation is highly disputable and may be questioned again.Google Scholar

13 Specifically, the G-REIT may not hold shares in limited liability companies that in turn own real estate.Google Scholar

14 The listing shall assure that G-REITs do not compete with, but rather complement existing real estate investment vehicles such as Open Property Funds. If listed in Germany, G-REITs may be listed on the organized market in terms of Section 2 para. 5 of the Securities Trading Act, i.e. on the so called official market in terms of Sections 30 et seq. of the Börsengesetz (Stock Exchange Act - BörsG) (“amtlicher Markt“) or the organized market in terms of Sections 49 et seq. of the Stock Exchange Act (“geregelter Markt”), but not on the inofficial market in terms of Sections 57 of the Stock Exchange Act (“Freiverkehr“); see the bill's explanatory statements under B. Article 1 Section 10.Google Scholar

15 Section 1 para. 3.Google Scholar

16 E.g. insider rules according to Sections 12 et seq. of the Securities Trading Act, etc.Google Scholar

17 Section 1 para. 2.Google Scholar

18 Section 9. The bill does not exclude consulting external investment advisors, such as asset managers; this might be recommendable, however, calling external advisors may smoothly blend to turning away from the AG's corporate structure if the board of directors only controls the advisors.Google Scholar

19 Section 4; the legislator considers this amount as usual minimum capitalisation for listing; see the bill's explanatory statements under B. Article 1 Section 4. However, experience shows that by far higher capitalisation is recommendable for listing.Google Scholar

20 Section 5.Google Scholar

21 Sections 6 and 7.Google Scholar

22 Section 8.Google Scholar

23 Section 2.Google Scholar

24 Section 12, see below.Google Scholar

25 The stock corporation is registered as pre-REIT if in the application it asserts, and if necessary proves, that it complies with the other pre-REIT requirements.Google Scholar

26 With respect to the Exit Tax, Article 2 of the bill.Google Scholar

27 This term may only be extended under certain external conditions for another year, Section 10 para. 2.Google Scholar

28 Section 10.Google Scholar

29 See infra.Google Scholar

30 See in each case the footnotes of a requirement.Google Scholar

31 See the bill's explanatory statements under B. Article 1 Section 11.Google Scholar

32 Section 11.Google Scholar

33 Section 11 para. 4.Google Scholar

34 If the 10% limit set forth in Section 11 para. 4 is ignored for three consecutive years, the G-REIT loses its tax exemption, Section 18 para. 3.Google Scholar

35 Section 16 para. 2.Google Scholar

36 E.g. as regards the withholding tax rate according to an applicable double taxation agreement, see the bill's explanatory statements under B. Article 1 Section 16.Google Scholar

37 As a first sanction of non-complying with this requirement in the end of the business year, the Tax Authority in charge determines a penalty fee dependent on the extent of non-compliance, Section 16 para. 3.Google Scholar

38 Section 12. Assets are evaluated at their market values. Non-compliance with this requirement is sanctioned by the Tax Authority in charge by means of a penalty fee dependent on the extent of non-compliance, Section 16 para. 4.Google Scholar

39 Section 15. The bill only provides for bank financing; it is to be hoped that the G-REIT Act will provide for financing on capital markets by floating bond issues or participating certificates, too.Google Scholar

40 Section 12. Assets are evaluated at their market values.Google Scholar

41 Section 13. Non-compliance with this requirement is sanctioned by the Tax Authority in charge by means of a penalty fee dependent on the extent of non-compliance, Section 16 para. 5.Google Scholar

42 Different from the REIT legislation in the U.S., Great Britain, and France, the G-REIT's tax exemption is fully granted; especially, it is not limited with respect to distributed profits or profits generated by characteristic REIT business. Thereby, the legislator intended to assure the inapplicability of the EU Parent Subsidiary Directive, see the bill's explanatory statements under B. Article 1 Section 16. In international comparison, quite a substantial part of the G-REIT's income is privileged.Google Scholar

43 Section 17.Google Scholar

44 Section 18 para. 1.Google Scholar

45 Section 18 para. 2; for definition of trade see footnote no. 10.Google Scholar

46 Section 18 para. 3.Google Scholar

47 Section 18 para. 3.Google Scholar

48 Section 18 para. 4.Google Scholar

49 Section 18 para. 5.Google Scholar

50 Section 18 para. 5.Google Scholar

51 Furthermore, the financial administration expects an increase in tax earnings due to the disclosure of hidden reserves.Google Scholar

52 The Exit Tax is also applicable to transfers of real estate to pre-REITs and German real estate special assets in terms of Section 66 of the Investmentgesetz (German Investment Act).Google Scholar

53 So far, the transfer tax rate is 3.5% in Germany; however, in consequence of the reform of federalism in Germany, each state (“Bundesland“) may determine its own tax rate. The communal estate of Berlin, for example, plans to invent a transfer tax rate of 4,5%.Google Scholar

54 Section 19 para. 1. This applies also to income from foreign REITs, Section 19 para. 2 and 6.Google Scholar

55 Section 19 para. 5. This leads to double taxation of income from G-REIT service companies and foreign subsidiaries holding real estate. The legislator has realized this double taxation; it is to be hoped that ways of exemption will be opened.Google Scholar

56 Section 20 para. 1 and 2. This guarantees that, in principle, every investor is subject to tax in a first step and may – under certain circumstances – apply for repayment or set-off of tax paid. In comparison to taxation of other stock corporations’ distributions, the higher tax rate of 25% is justified for tax transparency reasons.Google Scholar

57 According to the “OECD Model Convention with Respect to Taxes on Income and on Capital” from 2003 (OECD-MC), income from dividends may be subject to taxation under the regulations of the investor's home country. Then, taxation in Germany is generally limited to 15% according to Article 10 para. 2 of the OECD-MC.Google Scholar

58 Instead, G-REIT income could have been classified as “income from immovable property” according to Article 6 OECD-MC, with the consequence of full taxation in the country where the property is situated. According to Article 6 para. 2 OECD-MC, the term “immovable property” shall have the meaning which it has under the law of the country in which the property is situated.Google Scholar