Article 6a of the German Real Estate Transfer Tax Act (GrEStG): The new gold standard for real estate transfer tax (RETT) structures

published on 23 February 2024 | reading time approx. 4 minutes

At the last minute, the legislator has spared Articles 5 and 6 of the German Real Estate Transfer Tax Act (GrEStG) and the exemptions continue to apply in 2024, despite the German Act on the Modernisation of Partnership Law (MoPeG). However, there is still a threat of a state aid deadlock at EU level. This makes the clause governing groups of undertakings (Article 6a) GrEStG an attractive option.

Due to exemptions under Articles 5 and 6 GrEStG, partnerships such as GmbH & Co. KG or GbR are largely treated as flow-through entities for RETT purposes. As long as the partners’ shares in the partnership's assets do not change, contributions and transfers of shares are exempt from RETT. These exemptions are based on the civil law concept of “Gesamthand” (“joint ownership”), which was, however, abolished on 1 January 2024 by the Act on the Modernisation of Partnership Law (MoPeG). Nonetheless, for RETT, the legislator wanted to leave things as they were: a fiction where partnerships with legal capacity continue to be regarded as joint ownership and their assets as jointly owned assets has been upheld.

Articles 5, 6 GrEStG raise constitutional and EU law-related doubts

Already in the run-up to the changes, there were doubts as to whether an exemption for partnerships from 1 January 2024 would be admissible at all. On the one hand, there are constitutional concerns, but even more problematic is the fear that Articles 5, 6 GrEStG could now constitute state aid in violation of EU law. Regardless of how serious the non-financial risks are, the quantitative real estate transfer tax risk can often threaten an entity's entire existence; this is because the aforementioned exemptions apply to a tax burden for a purely internal transaction which – unlike a sale to a third party – does not generate any liquidity.

Anyway, the repercussions will be drastic if the European Court of Justice subsequently finds that the Articles constitute unlawful state aid: the tax office will have to rescind the previously granted tax advantage – meaning that it will have to levy RETT – even if the tax assessment notice is already final under German national law or even if possible tax claims arising from the transaction are already time-barred. In such a case, not even a binding advance tax ruling will grant protection of legitimate expectations that are based on the statutory regulation.

Article 6a as a secure alternative

Months of anxious waiting for an ECJ ruling on whether a regulation that grants an exemption conflict with EU state aid law is of course a poison pill for tax planning in a reorganisation – and this is where the clause governing company groups (Article 6a) comes into play as an interesting addition to Articles 5, 6 GrEStG.

In the past, the clause governing groups of undertakings was primarily used for transactions involving corporations; for partnerships, Articles 5 and 6 GrEStG were much easier to handle. This is because the requirements under Article 6a GrEStG are much more complex:

In the case of Articles 5 and 6 GrEStG, it is irrelevant in which way real property or shares are transferred; Article 6a GrEStG, on the other hand, only applies to transformations under the German Transformation Act and to contributions or other by-law-related acquisitions. Further restrictions depend on whether shares or real property are transferred: In the case of the latter, the real property must be transferred ipso jure, that is, either under the Transformation Act or by way of accretion of a partnership. A simple contribution will be adequate only for share transfers.

However, those not deterred by these complexities will be rewarded with an exemption free from any constitutional or EU law-related uncertainties. In the best-case scenario, the planned structure will have to be adjusted only minimally – example (simplified):

Person “A” holds 100 % of shares in the assets of his real estate holding company, Immo GmbH & Co. KG. He wants to contribute them into a new Holding GmbH & Co. KG.

Solution:

The transfer of the shares is taxable in accordance with Article 1 para. 2a GrEStG.

To enjoy the exemption under Article 6 GrEStG, A must, on the one hand, observe the retention period concerning the assets of Immo GmbH & Co. KG prior to the transaction and, on the other hand, retain his shares in the assets of Immo GmbH & Co. KG (via the holding company GmbH & Co. KG) for the subsequent retention period of 10 years. However, if the ECJ were to determine at some point that Article 6 GrEStG constitutes unlawful state aid, the tax exemption would cease to apply and RETT would be payable in full.

To enjoy the exemption under Article 6a GrEStG, however, it is important to transfer the shares to Holding GmbH & Co. KG within the act of its formation by a noncash contribution. The subsequent retention period applies only to the shares held by A in Holding GmbH & Co. KG; these two constitute the relevant “group of undertakings”. The shares held in Immo GmbH & Co. KG are irrelevant for Article 6a GrEStG.

A free-of-charge contribution would thus block the application of Article 6a GrEStG; the said formation through noncash contributions however meets the requirements for both exemption regulations. There is no need to decide, which exemption is claimed in advance or even while retention periods are still pending.

This can be an attractive option because Article 6a GrEStG offers advantages compared to Articles 5 and 6 GrEStG also in terms of requirements: For example, the retention periods under Article 6a GrEStG are only 5 years, whereas they are up to 15 years under Articles 5, 6 GrEStG.

Conclusion

As regards structuring involving partnerships, Article 6a GrEStG governing company groups has often stood in the shadow of other laws due to its more complex requirements. Currently, it is impossible to foresee whether there will actually be a debate as to whether Articles 5 and 6 GrEStG constitute unlawful state aid. To rule out any uncertainties in the event of structural changes, it should be checked whether the requirements of Article 6a GrEStG can be met alternatively or additionally. A positive side effect of meeting requirements of Article 6a GrEStG would be that the retention periods might be reduced from ten or even fifteen to just five years.