New regulations pertaining to the assessment base for real estate transfer tax (RETT) purposes – Restrictions already in effect

In a previous article we had already reported on the Law Amending the Real Estate Transfer Tax Act (Gesetz zur Änderung des Grunderwerbsteuergesetzes, GrEStG) of 12.5.2021. Besides the widening of the scope of the so-called ‘supplemental taxable events’ (Ergänzungstatbestände) that is described in this legislation, a regulation pertaining to the assessment base for RETT purposes was also adopted there and is analysed in more detail in the following section. This regulation aims at preventing structuring intended to minimise RETT and has already been in effect since 1.7.2021.

The consideration or the value of the real estate as an assessment base?

If a piece of real estate is transferred from a seller to a purchaser then, normally, the RETT would be determined on the basis of the agreed consideration, i.e. the purchase price agreed between the contracting parties for the piece of real estate. This principle applies even if the agreed purchase price deviates considerably from the fair market value of the piece of real estate because of a personal relationship between the seller and the buyer. The difference between the purchase price and the fair market value of a piece of real estate would not be included in the assessment base for RETT purposes even in the case of a sales transaction between a company and its shareholder(s) (although for income tax purposes the difference would have to be treated as a constructive dividend) insofar as the purchase price is not merely a symbolic one (e.g., €1).

It is only in specific cases that RETT would not be determined on the basis of the consideration but, instead, based on the value of the real estate; in such cases, under German valuation law, the real estate value would then have to be separately assessed. These rules are also applied, in particular, in the case of corporate reorganisations (if the conditions of the exempting corporate group clause have not been met) where the real estate owned by the transferring legal entity is not transferred to the acquiring entity via an individual real estate purchase agreement but instead via universal succession.

Previous tax structures in the case of corporate reorganisations

Up to now, when applying these rules, it has been possible to significantly reduce the high RETT charges that are incurred on real estate assets when they are transferred by making use of specific structures.

Such tax structuring made use of the retroactive effect to the prior year’s balance sheet that is usual in the case of corporate reorganisations for income tax purposes. In the course of this, in the retroactive period, the pieces of real estate included in the assets that are transferred are sold to the acquiring entity at a purchase price below the fair market value. As per the priority to take the consideration as an assessment base, as described above, the RETT would thus only have to be paid on the purchase price that is actually too low. Additional income tax disadvantages (such as tax charges on constructive dividends) would not even arise as a result of the retroactive application.

The legislative response – a break with the prioritisation of the consideration

Lawmakers have now classified individual sales of real estate ahead of the corporate reorganisation coming into effect under civil law as inappropriate tax structuring. The inclusion of Section 8(2) sentence 1 no. 4 GrEStG has closed this tax loophole.

Under this new provision, – and starting from 1.7.2021 already –, in such cases, RETT will no longer be calculated on the basis of the too low a purchase price paid but, instead, on the basis of the value of the real estate. This will thus ensure that the treatment for RETT purposes would be the same as in the case of corporate reorganisations where no real estate was sold during the retroactive period.

Recommendation: The recent developments in RETT legislation mean that, in terms of tax, there will be further restrictions with respect to the leeway and optimisation possibilities. Forthcoming business restructurings that involve real estate-owning companies should routinely be subjected to a comprehensive review as regards RETT.