BDO Indirect Tax News

Germany - Compatibility of the real estate transfer tax with EU rules under scrutiny

A German court has requested a preliminary ruling from the Court of Justice of the European Union (CJEU) about the compatibility of the German Real Estate Transfer Tax (RETT) with EU law.

Transactions involving German real estate (i.e., sales, transfers, changes in ownership, etc.) typically trigger RETT at a rate of 3.5% - 6.5% of the purchase price or asset value, with the actual tax rate depending on the federal state in which the property is located. The RETT rules apply where:
  • 90% or more of the interests in a German real estate-owning partnership are transferred directly or indirectly to new partners within a 10-year period; or
  • 90% of the shares in a real estate-owning corporation directly or indirectly change hands within a 10-year period; or
  • There is a direct or indirect unification of at least 90% of the shares in a real estate-owning company in the hands of one shareholder or a group of related shareholders.
In the first two cases, exceptions apply to listed companies. (For prior coverage, see the article in the July 2021 issue of Corporate Tax News.)

In 2009, Germany added a “group clause” to the Real Estate Transfer Tax Act, which grants an exemption from RETT for direct or indirect transfers in the course of a corporate reorganisation under the laws of an EEA member state provided certain conditions are fulfilled (e.g., there must be a direct or indirect shareholding of at least 95% between the RETT group members for five years before and after the transaction). However, the group restructuring exemption does not fully incorporate the requirements of the EU Capital Transfers Tax Directive (prohibition of prior or subsequent retention periods and group relations) and, in addition to the German tax authorities’ restrictive interpretation of the exemption, the group clause has been the target of ongoing criticism. Additionally, in certain circumstances, restructurings within a group may trigger multiple RETT liabilities. German companies are therefore less flexible vehicles for the holding of real property than companies located in other EEA member states.

In a decision dated 8 February 2023, the tax office disallowed the group exception in a merger. The case involved a stock corporation in Austria that was the ultimate parent company of a group of companies, which held several properties in Germany via intermediary companies for various group divisions. The group decided to undertake a restructuring in the form of a (downward) merger of the ultimate parent into a subsidiary pursuant to Austrian law. However, the group clause requirements were not met due to the specific ownership structure within the group and the German tax office assessed RETT. The decision of the tax office was upheld by the Munich tax court and the court also ruled that the RETT rules are compatible with the EU Capital Transfers Tax Directive. The case was appealed to the Federal Fiscal Court (BFH), which referred the case to the CJEU. The BFH asked the CJEU to rule on whether the German RETT rules, under which the direct or indirect transfer of 95% of the shares in a company to another party is subject to taxation in the case of existing real estate assets, conflict with article 5 of the directive, according to which EU member states do not levy any indirect taxes on reorganisations. There could also be an exception to this rule, whereby member states could levy transfer taxes on the transfer of real estate located in their territory and therefore allow RETT.

Taking into account CJEU jurisprudence on the implementation and application of the Capital Transfer Tax Directive in other EU member states, there are substantial reasons that the German rules do not sufficiently exempt restructurings from RETT, giving rise to doubts as to their compatibility with EU law.

The Munich tax court ruled that the German RETT rules are compatible with the EU Directive. If the CJEU confirms this, German law will not have to be modified and reorganisations will remain challenging. However, should the CJEU decide that the German RETT rules are incompatible with the directive, affected parties would be able to invoke the directive directly and RETT taxation would no longer apply in certain cases. In addition, German law would have to be revised.

In view of the pending proceedings, any planned restructurings should be examined carefully and, if possible, confirmed in advance with the German tax authorities. In the case of restructurings that have already been carried out and subsequent RETT assessments, appeals should be lodged regularly to enable taxpayer to wait for the CJEU decision with regard to the nontaxability of restructurings.

Liliane Kleinert
Roland Spiedel
BDO in Germany
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