Real estate transfer tax risks for reorganisations outside Germany

When corporate reorganisations take place in multinational groups which own real estate in Germany there is often a risk that German real estate transfer tax (RETT) can be triggered.

The background to this is the complex structure and wide scope of RETT with limited relief clauses for group internal reorganisations. In its recently published ruling, the Federal Tax Court (the Bundesfinanzhof – “BFH”) addressed the application of the most relevant group relief (§ 6a of German Real Estate Transfer Tax Act; the Grunderwerbsteuergesetz – “GrEStG”) in a reorganisation involving EU and non-EU companies. In the context of this ruling, we will provide a general overview on RETT aspects concerning reorganisations outside of Germany.

Simplifying German RETT

German RETT law covers a wide range of transactions which trigger RETT. Different to income taxes, for which a more economic approach is used, RETT is based strongly on civil law principles. German civil law distinguishes between the signing of a purchase agreement and the execution of it (Closing). Both events can trigger RETT and as such, should a reorganisation not be carefully structured, it may lead to multiple ‘triggering events’. As a basic principle, RETT is already due upon the conclusion of a purchase agreement for a real estate asset. Additionally, the law includes various supplementary provisions for asset deal transactions, such as the transfer of a real estate asset without a prior purchase agreement.

Further, the law also covers multiple forms of share deals concerning the direct and indirect transfer of (i) partnerships (e.g. GmbH & Co. KG) and (ii) corporations (e.g. AG and GmbH). In principle, RETT is triggered if the direct or indirect ownership of at least 90% in a company owning real estate is somehow transferred. In order to tackle RETT avoidance schemes, the law covers various types of potential transactions which can be fulfilled multiple times in one reorganisation. For instance, RETT is triggered if a company signs a purchase agreement concerning the direct or indirect transfer of at least 90% of the shares in a company owning real estate. However, the transfer of those shares also triggers RETT if no prior agreement had been signed. Even the transfer of 90% of the ownership in such shares over a period of 10 years (in separate transactions) to different acquirors, where none of the acquirers own 90%, triggers RETT.

In general, the RETT law does not make a distinction if an event occurs between unrelated parties or within a group.

The person owing the RETT could be the acquiror, the transferor and/or the company owning the real estate (where the management may not even be aware that a transaction occurred). If RETT is triggered, the person(s) subject to RETT have a very short deadline of two weeks to notify the tax authorities; one month if the person is not a German tax resident.

For group internal reorganisations including indirect changes, there is just one relief preventing the application of RETT (§ 6a GrEStG). In essence, the rule covers only a certain type of reorganisations (e.g. specific corporate reorganisations such as mergers, spin-offs, specific share-for-share exchanges). Such reorganisations need to be based on the law of a member state of the EU or the EEA. Additionally, it includes holding periods (five years before and after the transaction) as well as minimum participation requirements (at least 95%).

BFH decision of 25 September 2024 (II R 36/21)

With its ruling of 25 September 2024, the BFH had to decide whether a share transfer occurring outside of Germany could benefit from the group relief.

Simplified facts of the ruling:

The Ireland-based Company I1 was the 100% shareholder of the Irish-based Company I2. I2 was the 100% shareholder of Company X which owned real estate in Germany. In 2010, I1 established B1 in the British Virgin Islands under local company law. B1 was considered a tax resident of Ireland. B1 and I1 concluded a share purchase agreement to transfer 100% of the shares in I2 incl. the shares of X to B1 for a cash payment. The taxpayer argued that there was no taxable RETT transaction. Alternatively, the transaction would be exempt from RETT under § 6a GrEStG. Given that it was argued that establishing B1 was part of the reorganisation, the lower tax court had found that because B1 was established under the law of the British Virgin Islands, no reorganisation had been carried out under the law of an EU/EEA state. The fact that B1 was tax resident in Ireland was irrelevant.

Ruling:

The BFH first confirmed its previous case law that the extension of shareholder chains, i.e. the interposition of a company between a group parent and another group company owning real estate constitutes a taxable event. The fact that the real estate continues to be indirectly attributable to the same group parent is irrelevant.

The court further stated that the reorganisation was also not eligible under § 6a GrEStG. In this context, it was decisive whether the establishment of B1 and the subsequent transfer of shares in I2 constituted a corporate reorganisation based on the law of an EU/EEA member state. The BFH confirmed the lower court’s line of arguments and denied the application of the group relief.

Additionally, it stated that the acquisition of shares by B1 qualified as a share transfer by way of a singular succession. The court indirectly confirmed that corporate reorganisations, according to German understanding, require universal succession. Universal succession is characterised by the fact that the entire transferred assets (and liabilities) with all rights and obligations pass to the acquirer, who assumes the legal position of the legal predecessor.

Conclusion

The ruling once again highlights the risks involving RETT for foreign groups when it comes to reorganisations. It must be noted that the relevant tax year of the ruling was 2010 at which time the scope of § 6a GrEStG had been even narrower than it is now. This is because it covered only formal corporate reorganisations like mergers and spin-offs. Today, certain types of contributions of shares (against new shares) can also benefit from the rule even without universal succession. Nevertheless, it is unlikely that the court would have decided differently had the extended scope already applied, as even now share transfers without either new shares (as a consideration) or other changes to the shareholder structure are not eligible.

What we can take away from the court case:

The tax courts confirmed that group internal reorganisations generally trigger RETT even if economically speaking the indirect owner (e.g. group parent) remains the same.

A reorganisation happening outside of Germany needs to be reviewed carefully if it (i) triggers RETT and (ii) can be eligible under the group relief. Reorganisations common in other jurisdictions may not benefit, for instance, if they do not include universal succession or a change in the shareholder structure.

If companies established outside of the EU/EEA are involved, it needs to be checked whether and to what extent the RETT triggering transfer is (also) based on the law of an EU or an EEA member state. Here, the specific facts of the reorganisation are decisive. A lower tax court recently ruled (without further argumentation) that also companies established in a jurisdiction outside the EU/EEA may benefit, if a double taxation treaty between Germany and such jurisdiction is in place with a clause comparable to Art 24 OECD-MC. However, an appeal procedure against this decision is currently pending at the Federal Tax Court.  

Foreign companies are well advised to check every internal reorganisation measure for potential German RETT risks. Past experience has shown that the German tax authorities regularly identify such measures, even without prior notification. If the corresponding transaction is uncovered, not only will RETT be assessed (multiple times) with penalties being incurred, but the non-compliance could also result in personal consequences for the management.