Asset deals and share deals in the real estate industry are two different models for selling a property. In an asset deal, ownership is transferred entirely to the buyer. In a share deal, only a share in a company is sold and the property remains in the possession of the company. Below, we explain the two different models and outline their advantages and disadvantages.
The asset deal with real estate
In the real estate industry , an asset deal refers to the sale of a property where ownership is transferred in full from the seller to the buyer. After the sale, all property rights belong to the buyer.
This principle of asset deals can be applied not only to typical real estate purchases but also to other assets or valuables: An asset deal can occur in construction contracts, general takeover models, land purchases with contract transfer, and property outsourcing through sale and leaseback. In summary , an asset deal transfers ownership of a valuable item from the seller to the buyer.
Real estate transfer tax is always payable when more than 94.9% of the company shares are transferred in a sale process – in an asset deal, 100% of the shares or the real estate are transferred, so that real estate transfer tax is payable. To avoid real estate transfer tax, some buyers opt for a share deal!
The share deal with real estate before the new real estate transfer tax law
In a share deal , the buyer, usually a special purpose vehicle, acquires the companyitself .This can result in an indirect real estate acquisition if the company's operating assets include real estate. A share deal is therefore essentially a transfer of shares in a company: the company shares are transferred to the buyer. But beware: the actual owner of the real estate remains the company itself for the time being.
From a legal perspective, this is a purchase of the company and not a purchase of real estate. This means that all liability risks and obligations, such as employment contracts, loan agreements, and tax liabilities of the company must also be assumed,which entails tax and legal costs. However, the special feature of a share deal is that there is no real estate transfer tax. As long as the buyer does not purchase more than 94.9% of the company shares, no real estate transfer tax is payable. After five years, the remaining 5.1% can also be transferred to the buyer. The share deal is therefore a tax loophole and offers a good opportunity to acquire real estate without having to pay real estate transfer tax. Nevertheless, it is important to take a close look here, as there are pitfalls and new legal regulations have come into force in 2021. On the one hand, there is a share deal involving real estate owned by a partnership, and there is a share deal involving real estate owned by a corporation, as well as a new stock exchange clause in the Real Estate Transfer Tax Act.
Share deals involving real estate owned by a partnership or a corporation – the new Real Estate Transfer Tax Act
Since July 1, 2021, there have been new regulations in the Real Estate Transfer Tax Act that change the previous regulation with the 94.9% commercial tax-exempt transfer share.
In principle, a distinction must now be made between share deals involving real estate owned by a partnership and those owned by a corporation.
In the case of a share deal involving the acquisition of a partnership with real estate holdings, the sale remains tax-exempt only if no more than 89.9% of the shares are purchased. In addition, the transfer period for the real estate from the remaining 10.1% has been increased from five years to ten years. The conditions for simply avoiding trade tax have therefore become more difficult for buyers.
In the case of a share deal acquisition of a corporation that owns real estate, only a maximum of 89.9% may now be purchased in order to avoid trade tax.
Another new feature of the Real Estate Transfer Tax Act is the so-called stock exchange clause, which reinforces the exemption from real estate transfer tax. It now stipulates that a share deal involving company shares traded on a stock exchange does not constitute an acquisition of real estate and, by extension, is not subject to real estate transfer tax.
Advantages and disadvantages of share deals
The relatively simple structure is initially an advantage of share deals: since a share deal involves the acquisition of not only assets but the entire company, all legal relationships are transferred to the buyer without having to be specifically named. This is practical, but also carries risks, as the buyer automatically acquires all known and unknown liabilities. In order to identify these liabilities, the company should undergo a due diligence review prior to the share deal acquisition. This often means that a share deal is not a good option, especially in times of crisis. Since an asset deal involves the pure sale of the property, this may be the better choice in order to avoid risks.
Whether asset deal or share deal, it is particularly important to take a close look at real estate transactions and weigh up all the options, because even the smallest details can make a big difference. Tax aspects may not play a primary role at first, but with high investment sums, often in the millions, tax expenses can pose a considerable risk for the buyer. To make the right decision, it is particularly worthwhile to seek professional support from a tax advisor.
