In a decree dated October 16, 2023, the German tax authorities adopted provisions from two rulings of the German Federal Fiscal Court (BFH) from 2021 and 2022 on the allocation of real estate and also established further new criteria. The new criteria set out by the tax authorities—which will be applied with immediate effect—may have a significant impact on documentation and tax notification obligations, as well as potentially significant additional tax burdens due to potential double taxation. This affects groups and investment funds with German real estate, particularly if the real estate is held in multilevel shareholding chains.
The Aligned Decree of the German Federal States (Gleichlautender Ländererlass - GLE) represents the administrative opinion agreed between the highest tax authorities of the German states on the implementation of the German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz - GrEStG) following the judgments of the BFH with file number II R 44/18 of December 1, 2021 and file number II R 40/20 of December 14, 2022.
The GLE addresses the allocation of real estate exclusively for the fictitious taxable transfer events set out in Section 1(2a)–(3a) GrEStG—so-called share deals. According to these rules, certain direct and indirect transfers of shareholdings in partnerships or corporations will trigger real estate transfer tax (RETT) if one of the companies concerned is a “real estate holding company,” i.e., if real estate located in Germany is allocated to such company.
According to the tax authorities, the following should now apply to the allocation of real estate:
- First, the GLE confirms the recognized principle that, for the purposes of RETT, the allocation of a property is based neither on civil law nor on Section 39 of the German Fiscal Code (Abgabenordnung), but that only the so-called RETT allocation is decisive.
- A property is to be allocated to a company for the purposes of a share deal relevant for tax purposes under Section 1 (2a)–(3a) GrEStG if the company has previously realized an acquisition transaction in relation to this property that falls under Section 1 (1) or (2) GrEStG (in particular, an asset deal)—as also decided by the BFH in judgments II R 44/18 and II R 40/20.
- According to the GLE, a property should no longer be allocated to a company if a third party has realized an acquisition transaction in relation to this property that falls under Section 1 (1) or (2) GrEStG (in particular, an asset deal) (see also BFH judgment II R 40/20) whereby the effective conclusion of the respective asset purchase agreement (signing) is the relevant point in time for RETT purposes.
- According to the GLE, the same property is now also to be allocated to another company if this company realizes an acquisition transaction with regard to this property that falls under Section 1 (3) or (3a) GrEStG; the BFH had not addressed the issue of possible double allocation in its judgment II R 44/18. The mere holding of a participation at a certain shareholding quota shall not be sufficient for allocation of a property.
- According to the GLE, the allocation of a property to a company for the purposes of Section 1(2a)–(3a) GrEStG shall end if
- a third party realizes an acquisition transaction falling under Section 1(3) or (3a) GrEStG in relation to this property,
- the shareholding of the company in the property holding company falls below the relevant shareholding quota (generally 90%) for Section 1(3) and (3a) GrEStG, or
- the property is no longer allocated to the (directly) property holding company; this corresponds to the criteria of the BFH’s judgment II R 40/20.
However, the allocation of a property shall explicitly not be terminated by the fulfillment of a taxable event set out in Section 1(2a) or (2b) GrEStG (cases of a fictitious new shareholder), as also stated by the BFH’s judgment II R 40/20.
- According to the GLE, the following is now to apply with regard to the conflict between the taxable events under Section 1(2a)–(2b) GrEStG (cases of the fictitious new shareholder with the closing as the relevant taxable date) and Section 1(3)–(3a) GrEStG (all share transfers with the signing as the relevant taxable date):
- If Section 1(2a) or (2b) GrEStG and Section 1(3) no. 2, no. 4, or (3a) GrEStG are realized at the same time, for example, in case of a merger, Section 1(2a) or (2b) GrEStG takes precedence and Section 1(3) or (3a) GrEStG is superseded. Accordingly, the allocation of the property should not change in this case.
- If the realization of Section 1(3) no. 1, no. 3, or (3a) GrEStG and the realization of Section 1(2a) or (2b) GrEStG diverge, for example, if the signing and closing of an SPA (as usual) diverges, the taxable event under Section 1(3) or (3a) GrEStG will be realized first. As a result, the property shall then be allocated to the purchaser of the shares. A nonassessment or cancellation of RETT pursuant to Section 16(4a), (5) sentence 2 GrEStG after the closing shall also not affect this allocation.
- In addition, according to the GLE, the tax authorities are of the opinion that if an acquisition is reversed in accordance with Section 16 GrESt, the allocation of the property shall only change after the GrESt assessment has been canceled and without retroactive effect. In case of a repurchase in accordance with Section 16(2) GrEStG, the allocation shall be terminated upon conclusion of the purchase agreement for the repurchase.
The aforementioned statements of the GLE do not constitute a law and thus have no direct legal effect, whereas they are binding on the tax administration during the tax assessment procedure. This means that tax assessments issued on the basis of the new GLE can still be contested in court, whereby the assessment in question will then be reviewed with regard to statutory law and higher court rulings—in particular by the BFH.
The extensive new allocation criteria under the GLE can potentially have a significant impact on envisaged share sales and on intragroup reorganizations; in particular, there is a risk of double taxation with RETT at different levels in multilevel shareholding chains. It is also advisable to adapt current compliance processes to the criteria set out in the GLE.
Companies that hold real estate located in Germany as part of their shareholding should therefore pay attention to the following in the future:
- In advance of planned share sales and restructurings, the RETT effects, in particular, potential double RETT burdens, should be analysed in detail in order to identify tax payment and tax notification obligations under the GLE in due time. German RETT effects can also arise from purely non-German transactions.
- Identified tax notification and payment obligations must be integrated accordingly in the documentation for the envisaged transaction, and the transaction structure may potentially also be adjusted to minimize risk. It should also be noted that RETT notification periods are very short and can sometimes be as short as two weeks (in each case after signing and/or closing).
- As part of ongoing compliance, the acquisition and restructuring history in relation to German real estate should be carefully documented for each individual property. In particular, all transactions relating to shareholding along the entire shareholding chain should be included in order to enable a precise review of the allocation of real estate in accordance with the above GLE criteria in the event of share sales and restructurings.
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