Changes in German tax law affect foreign-to-foreign transactions. The impact on nonresidents will be significant, including compliance challenges.

Until last year it was possible for nonresidents to avoid German income taxes on the sale of shares in nonresident, real-estate-rich companies, unlike the more direct transfer of real estate in Germany involving an asset deal.

Under the Annual Tax Act 2018, Germany now taxes nonresidents in the event of a disposal of shares in a nonresident corporation that directly or indirectly holds immovable property in Germany. Such extended nonresident income taxation brings into sharper focus an offshore indirect transfer of real estate in Germany after 2018. Affecting the entire chain of nonresident entities above the entity that directly holds immovable property in Germany, the lack of trading exemptions, setting the bar at 1% minimum ownership at any time in the five years preceding the indirect disposal, and capturing deemed share disposals all significantly broaden the scope of nonresident income taxation in Germany. Major practical difficulties have been ignored. Consequently, extended nonresident income taxation presents compliance challenges for nonresident investors and foreign-headquartered multinational corporations with real-estate-intensive business operations in Germany.