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Avoiding real estate transfer tax in the case of intragroup restructurings

With regard to the application of the so-called ‘corporate group reservation’ clause (Konzernvorbehalt) under Section 6a of the Real Estate Transfer Tax Act (Grunderwerbsteuergesetz, GrEStG), recently, the German fiscal administration has taken a very much more generous view, when compared with its previous interpretation, of the possibility of exempting specific intragroup restructurings from real estate transfer tax (RETT). In practice, this requires a careful weighing up of the structuring options.

Recent changes to regulations

In its latest ruling – which was published together with the identical decrees of the highest fiscal authorities of the Länder [Federal States], of 22.9.2020, (Federal Tax Gazette [Bundessteuerblatt, BStBl.] 2020 I p. 960) – the fiscal administration has fortunately followed, to a large extent, the most recent wide-ranging ruling of the Federal Fiscal Court (Bundesfinanzhof, BFH) of August 2019. Here, in seven rulings, the BFH took a position against the previous restrictive administrative opinion. We already reported on this in a previous article.

The very much broader interpretation of the RETT ‘corporate group clause’ – which, from now on, will thus also be recommended by the tax administration – has become more important especially because, with effect from 1.7.2021, the scope of the so-called ‘supplemental taxable events’ (Ergänzungstatbestände) under the GrEStG was widened and the respective requirements were also tightened. For example, in the context of share deals (thus, sales where the real estate itself is not transferred but rather shares in property-owning corporations), the critical shareholding threshold level has been lowered from 95% down to down 90%. Furthermore, for transfers that involve partnerships, the prior and subsequent holding periods were extended from five years to ten years and fifteen years respectively. These changes to the law – which we discussed in a previous article. – were implemented through the legislation to amend the GrEStG, of 12.5.2021.

These recent developments mean that, in the future, from a RETT perspective, it could be very much more advantageous to carry out restructurings within the scope of a 
reorganisation rather than through the simple transfer of a shareholding. The advantages that can be derived from the targeted use of the corporate group clause have been outlined below in examples of upstream and downstream mergers.

Example of a structure: In a parent/subsidiary/lower-tier subsidiary company structure, where the parent holds all the shares in the subsidiary and the subsidiary holds all the shares in the lower-tier subsidiary, we have assumed that both the subsidiary as well as the lower-tier subsidiary are property-owning companies. Moreover, we have assumed that this structure has existed for more than five years.

Analysis of advantages for upstream and downstream mergers

Upstream merger

If the lower-tier subsidiary is merged into the subsidiary then, from a RETT perspective, the following would arise as a result.

(1) For the subsidiary – In the course of the merger, the subsidiary will also acquire the real estate of the lower-tier subsidiary since its assets will be transferred in their entirety to the subsidiary. The acquisition of this real estate will initially be liable to RETT. Under Section 6a GrEStG, the RETT for this acquisition will not have to be paid because the requirements for the application of the corporate group clause have been met.

  • This constitutes a legal transaction within the scope of a reorganisation (merger).
  • Two dependent companies (the subsidiary and the lower-tier subsidiary) of the parent (as the controlling company) were involved in the merger. The criterion of ‘control’ has been met here since the parent holds at least 95% of the shares in the subsidiary and the subsidiary holds at least 95% of the shares in the lower-tier subsidiary.
  • The shareholdings had existed for five years already prior to the merger.
  • The five-year subsequent holding period requirement relating to the lower-tier subsidiary cannot be met because the lower-tier subsidiary ceased to exist as a result of the merger. Under the fiscal administration’s earlier strict interpretation, this impossibility of complying with the subsequent holding period would have resulted in the corporate group clause not being applicable; this would have meant that RETT would have had to be paid on the lower-tier subsidiary’s real estate portfolio. However, from now on, case law and the fiscal administration will be of the same opinion that the impossibility of complying with holding periods under the German Reorganisation Tax Act should not lead to denying the application of the corporate group clause.
  • Although, in order to preserve the tax exemption due to the corporate group clause, the parent company will have to hold the shares in the subsidiary for another five years.

For the real estate that the subsidiary itself holds there will be no RETT consequences for the subsidiary arising out of the merger because the real estate is still in the possession of the subsidiary.

(2) For the parent – For the real estate that the subsidiary holds there will likewise be no RETT consequences for the parent company because prior to as well as subsequent to the merger the parent will directly hold shares in the subsidiary.

As regards the lower-tier subsidiary’s real estate, the merger will result in the parent company’s existing indirect unification of shares being transformed into a direct unification of 
shares. This so-called bolstering of an already existing unification of shares does not once more fulfil the supplemental tax event of the unification of shares. Therefore, as a result of the merger of the lower-tier subsidiary into the subsidiary, all in all, the parent company does not incur RETT either.

Downstream merger

If the subsidiary is merged into the lower-tier subsidiary then, from a RETT perspective, the following would arise as a result.

(1) For the lower-tier subsidiary – In the course of the merger, the lower-tier subsidiary will also acquire the real estate of the subsidiary as its assets will be transferred in their entirety to the lower-tier subsidiary. The acquisition of this real estate will be liable to RETT and, as in the case of the merger in the opposite direction, likewise exempted from RETT under Section 6a GrEStG. The requirements for the application of the corporate group clause, described above, have likewise been met here. In particular, it does not matter (any more) that it is no longer possible to comply with the subsequent holding period (thus continuous ownership of the subsidiary by the parent) because the subsidiary has ceased to exist. Although, in this case, too, the parent company will have to hold the shares in the absorbing company – thus, here, in the lower-tier subsidiary – for another five years.

For the real estate that the lower-tier subsidiary itself holds there will be no RETT consequences for the lower-tier subsidiary arising out of the merger because this is still in the possession of the lower-tier subsidiary.

(2) For the parent – A merger in this direction (downstream merger) is likewise not deemed to be a supplemental taxable event – such as a unification of shares, for instance – at the level of the parent company. As regards the lower-tier subsidiary’s real estate, the shareholding is merely bolstered by becoming a direct shareholding instead of an indirect one. In terms of the subsidiary’s real estate, which has been transferred to the lower-tier subsidiary as a result of the merger, the parent company still has a direct shareholding in this respect.

Conclusion: The widening of the scope of supplemental taxable events, with effect from 1.7.2021, has once again considerably increased the complexity of real estate transfer tax legislation. In future, it will be necessary to monitor supplemental taxable events in parallel under the old as well as the new legislation. Thus, the old shareholding threshold of 95% will also remain relevant if, for example, after 30.6.2021 a shareholder had not yet breached that tax triggering point of 95% under the old legislation but had already reached the shareholding threshold of at least 90%.

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