In a Decree dated October 16, 2023, the German tax authorities adopted the provisions of two decisions of the German Federal Fiscal Court (BFH) of 2021 and 2022 regarding the allocation of real estate, and also established new standards. New standards established by tax authorities are effective immediately and may have a significant impact on documentation and tax notification obligations, as well as potentially resulting in significant additional tax liability due to the potential for double taxation. This has implications for groups and investment funds that hold German real estate, especially if the real estate is held in a multi-level shareholding chain.
Statute of Union of the German Federal States (Greyhero Tender Rendererus – GLE) represents an administrative opinion agreed between the highest tax authorities of the German states regarding the implementation of German real estate transfer tax law (Granderwerbschwergesetz – GrEStG) pursuant to the judgments of the BFH in file number II R 44/18 of 1 December 2021 and file number II R 40/20 of 14 December 2022.
GLE addresses the hypothetical taxable transfer event set out in GrEStG sections 1(2a) to (3a), the so-called allocation of real estate dedicated to stock transactions. According to these rules, certain direct and indirect transfers of shareholdings in partnerships or legal entities if one of the companies involved is a “real estate holding company”, i.e. real estate located in Germany is assigned. is subject to real estate transfer tax (RETT). To such a company.
According to the tax authorities, the following will apply to the distribution of real estate:
- First, the GLE confirms the recognized principle that, for RETT purposes, the allocation of property is neither based on the Civil Code nor on Article 39 of the German Financial Code (Abgabe Nordnung), but only the so-called RETT assignment is decisive.
- If the company has previously realized an acquisition transaction in respect of real estate falling under Article 1, the real estate is assigned to the company for the purpose of a tax-relevant share transaction under Article 1(2a) to (3a) of the GrEStG. You will be asked to do so. (1) or (2) GrEStG (particularly asset transactions)—this is also what he BFH decided in judgments II R 44/18 and II R 40/20.
- According to the GLE, if a third party realizes an acquisition transaction (in particular an asset transaction) that falls within GrEStG section 1(1) or (2), the property should not be allocated to a company. (See also BFH Judgment II R 40/20), the valid conclusion (signing) of the respective asset purchase agreement is the relevant point for RETT purposes.
- According to the GLE, if this company realizes an acquisition transaction with respect to this property that falls under Article 1(3) or (3a) of the GrEStG, the same property will also be assigned to another company. BFH did not address the issue of possible double assignment in its judgment II R 44/18. Having a certain shareholding quota is not enough to allocate wealth.
- According to the GLE, the allocation of assets to a company for the purposes of sections 1(2a) to (3a) of the GrEStG ends if:
- If a third party realizes an acquisition transaction that falls under Article 1(3) or (3a) of GrEStG regarding the Property,
- the company’s shareholding in the real estate holding company is below the relevant shareholding quota (generally 90%) of Article 1(3) and (3a) GrEStG; or
- Real estate will no longer be allocated (directly) to a real estate holding company. This corresponds to the criteria of the BFH judgment II R 40/20.
However, the allocation of assets does not expressly terminate with the fulfillment of a taxable event as provided for in section 1(2a) or (2b) of the GrEStG, as also stated in the BFH Judgment II R. None (for hypothetical new shareholders). 40/20.
- According to the GLE, with respect to the conflict between a taxable event under GrEStG sections 1(2a)-(2b) (the case of a hypothetical new shareholder with the relevant tax date being the closing date) and section 1, the following applies: It happened. (3)–(3a) GrEStG (all stock transfers signed as relevant tax date):
- For section 1(2a) or (2b) GrEStG and section 1(3), no. 2, no. For example, in the case of a merger, Article 1(2a) or (2b) GrEStG will prevail and replace Article 1(3) or (3a) GrEStG. Therefore, the distribution of property should not be changed in this case.
- If Section 1(3) is realized, no. 1, no. 3, or (3a) if the realization of GrEStG and section 1(2a) or (2b) GrEStG diverge. For example, if the signature and closure (as usual) of a SPA diverge, a taxable event under section 1(3) or (2b) will occur. (3a) GrEStG is realized first. As a result, the real estate is allocated to the purchaser of the shares. Non-assessment or cancellation of the RETT pursuant to Article 16(4a), (5) Sentence 2 of the GrEStG after the Closing will also not affect this allocation.
- Furthermore, according to the GLE, the tax authorities have taken the view that if the acquisition is canceled pursuant to Article 16 of the GrESt, the allocation of assets will change only after the GrESt valuation has been canceled and there will be no retrospective effect. In the case of a repurchase pursuant to Article 16(2) of the GrEStG, the assignment shall terminate upon execution of the sales contract for the repurchase.
The aforementioned GLE statements do not constitute law and therefore have no direct legal effect, but they are binding on tax authorities during tax assessment procedures. This means that tax assessments issued under the new GLE may still be challenged in court, and the assessments in question will then be reviewed by statutory law and higher court decisions, in particular the BFH. It will be.
The extensive new allocation criteria under the GLE could have a material impact on anticipated share sales and intra-group restructurings. In particular, there is a risk of double taxation due to his RETT at different levels of the multi-level shareholding chain. We also recommend aligning your current compliance processes with the standards set by the GLE.
Companies that hold real estate located in Germany as part of their shareholdings should therefore keep the following in mind in the future:
- Prior to a planned stock sale or reorganization, a detailed analysis of the impact of RETTs, and in particular the potential for double burden of RETTs, should be conducted in order to timely identify the tax and tax liability under the GLE. His RETT effect in Germany can also arise from purely non-German transactions.
- Identified tax notices and payment obligations will need to be integrated into the expected transaction documentation accordingly, and the transaction structure may also be adjusted to minimize risk. The notice period for a RETT is very short, sometimes as little as two weeks (in each case after signing and/or termination).
- As part of ongoing compliance, the acquisition and restructuring history associated with German real estate must be carefully documented for each individual property. In particular, all transactions related to shareholdings along the entire shareholding chain should be included, in order to be able to accurately consider the allocation of real estate in accordance with the above GLE criteria in the event of a share sale or restructuring.
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