In several recently published rulings, the German Federal Fiscal Court (BFH) has commented on several aspects of real estate transfer tax (RETT) in case of share deals—also contrary to the previous opinion of the tax authorities. This concerns potential RETT-exempt of the shareholding chain in partnerships, the classification of a Dutch foundation (stichting) for purposes of RETT exemptions and details of the classification of new and existing shareholders within the meaning of Section 1(2a) sentence 4 of the Real Estate Transfer Tax Act (Grunderwerbsteuergesetz - GrEStG).
In a ruling dated August 21, 2024, file number II R 16/22, the BFH discusses the RETT effects of extending the chain of participation in a real estate holding partnership for the purposes of Section 1(2a) sentence 1, sentence 2 GrEStG.
According to the BFH, partnerships are to be treated as transparent for the purposes of analyzing whether there is an indirect change in the participation structure of real estate holding partnerships of at least 95% (90% under current law). This means that in the case of multi-level partnerships, it is necessary to look through participating partnerships at all levels. A relevant (taxable) indirect change in the participation structure of a real estate holding partnership therefore only occurs if at least 95% (90% under current law) of the participation is transferred to new legal entities that under German corporate law do not have formal corporate law shareholders—i.e., individuals and legal entities other than corporations.
As a result, the extension of a shareholding chain in real estate holding partnership by one or more partnerships, without changes occurring at the level of ultimate individuals or corporations in the participation structure, does not constitute a relevant indirect change in the shareholder of structure in the real estate holding partnership and therefore is not subject to RETT pursuant to Section 1(2a) GrEStG. The BFH clearly positions itself against the tax authorities’ view in the Aligned Decree of the German Federal States (Gleichlautender Ländererlass - GLE) dated May 10, 2022, where the tax authorities ruled that there is no transparent assessment of newly acquired partnerships and that only a pro rata tax exemption pursuant to Section 6(3) GrEStG would be applicable in such case. It remains to be seen how the tax authorities will react to the new BFH ruling.
Due to the identical wording to Section 1(2b) GrEStG, this interpretation of the law likely also applies to indirect changes to the shareholding structure of a real estate holding corporation. However, it should be noted that this only applies to indirect changes. Regarding direct changes in the shareholding structure of a real estate holding company, a civil law approach continues to apply, so that direct transfer of shares/interest in the real estate holding company to a new legal entity can trigger RETT pursuant to Section 1(2a) or (2b) GrEStG.
It should also be noted that in the event of an extension of the shareholding chain through the (indirect) transfer of at least 90% of the shares/interest in real estate holding companies to one acquirer or a transfer resulting in a de facto or economic unification of shares/interest of at least 90% in the hand of one acquirer, RETT may still apply according to the rules set out in Section 1(3) and (3a) GrEStG. This means that the above-mentioned case law only applies with regard to the question of whether a so-called counting acquisition (Zählerwerb) exists for the purposes of Section 1(2a) GrEStG, but not with regard to other taxable events under Section 1(3) and (3a) GrEStG.
In its ruling of July 23, 2024, file no. II R 11/22, the BFH made a statement on the classification of a foundation under Dutch law (stichting) for the purposes of applying the RETT exemptions for German partnerships (Gesamthandsgemeinschaften) pursuant to Section 5 GrEStG.
The BFH first clarifies that the respective RETT exemptions are also applicable to foreign companies, provided that these are comparable to a domestic partnership (Gesamthandsgemeinschaft) according to the legal type comparison (Rechtstypenvergleich) to be made. For this analysis, the comparison of the structural characteristics of the companies under civil law is relevant; the form of taxation of the stichting in the Netherlands is irrelevant.
As a result, the BFH ruled that in the underlying lower court decision, the tax court of Münster had determined without legal errors that a Dutch foundation established in the form of an administrative foundation (stichting administratiekantoor) is not comparable to a domestic partnership. This is already apparent from the fact that a stichting differs significantly from a partnership under German law due to the lack of partners or members in the partnership. Under German law, at least two partners or members are required in order to form a partnership. In addition, certificates in a stichting would not provide for a proprietary share in the participation, in the stichting, but merely provide for subscription rights regarding income of the participation. The fact that the stichting is treated transparently for tax purposes in the Netherlands is irrelevant.
This view was again confirmed by the BFH in a recently published judgment (judgment dated October 30, 2024, file no. II R 14/23).
This has the consequence that RETT exemption pursuant to Section 5 GrEStG do not apply to Dutch foundations. However, the judgments do not further clarify the treatment of a Dutch foundation for the purposes of the so-called “acquisition substitute rules” (Ersatztatbestände) for RETT purposes under Section 1(2a) - (3a) GrEStG. Therefore, this remains open.
Most recently, in its ruling dated July 31, 2024, file no. II R 28/21, the BFH commented on the previously unresolved question of how changes in the shareholder structure in a corporation, which is a direct partner in a real estate holding partnership are to be specifically determined for the purposes of Section 1(2a) sentence 4 GrEStG (potential fictitious new shareholder – möglicher fiktiver Neugesellschafter).
The BFH ruled in line with the view of the German tax authorities that for the purposes of Section 1(2a) GrEStG, a clear structural distinction is to be made between partnerships and corporations that are directly participating in a real estate holding partnership. While directly participating partnerships can be "seen through" economically, a strict level principle applies to directly participating corporations. This means that persons who already hold a direct participation in the real estate holding partnership (including as general partners) but are obtaining a share in a corporation that is a direct partner in the real estate holding company for the first time are to be treated as new shareholders of the corporation and not as existing shareholders. This means that if at least 95% (90% under current law) of the shares in a corporation that holds a direct participation in a real estate holding partnership are transferred to new shareholders, even if these shareholders are already direct partners in the real estate holding company, the corporation is still deemed to be a new shareholder in the real estate holding partnership in its entirety pursuant to Sec. 1(2a) sentence 4 GrEStG.
Accordingly, this transaction may trigger RETT if it in total results in or in the future together with other transfers results in at least 90% of the interest in the real estate holding partnership being transferred to (fictitious) new shareholders within 10 years (relevanter Zählerwerb).
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