Multiple assignment of real estate for RETT purposes in share deals

published on 18 January 2024 | reading time approx. 3 minutes

In tax structuring or transaction practice where real estate owning companies are involved, the prevention from (multiple) real estate transfer tax is often an important objective. Therefore the attribution of real estate for RETT (real estate transfer tax) purposes within a group is crucial. However, there has been great legal uncertainty surrounding this issue, not least since the Federal Fiscal Court's rulings passed on 1/12/2021 (II R 44/18) and 14/12/2022 (II R 14/20).

In their decrees of 16/10/2023, the fiscal authorities finally describe their understanding of this issue and define the allocation of real estate for purposes of Article 1 sec. 2a, 2b, 3, 3a RETTA, concerning taxable share deal events. Alarmingly, they find that, for RETT reasons, the same piece of real estate may be assigned to several companies within a group. In many structures, this can lead to a situation where in a single transaction the same piece of land is taxed multiple times.

The following principles generally apply to the real estate transfer tax attribution in share deals:

Solely decisive for attributing a property is the real estate transfer tax allocation, i.e. if and when a specific piece of real estate meets the criteria defined in Article 1 sec. 1, 2, 3 and 3a GrEStG. Ownership criteria under civil law or Article 39 of the Fiscal Code are irrelevant in this context.
In RETT terms, real estate is allocated to the (purchasing) company as soon as the RETT event is triggered; this attribution ceases only when a third party triggers another taxable event pursuant Article 1 sec. 1, 2 RETTA concerning this piece of real estate.

The following conclusions by the fiscal authorities in their decrees of 16/10/2023 are now of essential significance:

In addition to the allocation of real estate to the company that purchased the real estate (“owner”), the real estate is also attributed to another, so called “other company” if that other company has realized a real estate transfer tax-liable transaction according to Article 1 sec. 3, 3a RETTA with respect to that real estate. This attribution ceases only when (i) the real estate is no longer attributed to the owner; (ii) a third party effects an acquisition transaction according to Article 1 sec. 3, 3a RETTA with respect to that piece of real estate; or (iii) the level of shareholding in the real estate owning company drops below 90% (or below 95% for transactions until 30 June 2021).

Thus, e.g. the transfer of 100% of shares in a company M, which previously acquired 100% of shares in a property owning company T, with that acquisition transaction being subject to RETT, generally results in real estate transfer tax levied both at the level of M and (again) at the level of T – for the same transfer transaction and the same property!

Attribution to another company is not released by Article 16 sec. 4a RETTA, either. I.e., when, a transaction already triggered RETT at signing (Article 1 sec. 3 no. 1 or 3 RETTA), the resulting attribution to another company is not cancelled by closing the transaction, that triggers a taxation according to Article 1 sec. 2a or 2b RETTA, which is prior to Article 1 sec. 3 RETTA.

Thus, if at least 90% of the shares in a property-owning company are consolidated upon the purchase, the property’s attribution to the buyer continues, even though the tax assessment for the share consolidation as per Article 16 sec. 4a RETTA is cancelled due to the subsequent closing according to Article 1 sec. 2a, 2b RETTA. Therefore, in the future, a detailed examination will be necessary before acquiring or restructuring a multi-tier corporate structure with real estate holdings, potentially reaching far into the past to identify in what order shares and property were acquired.

This also applies to transactions that have already been effective. The decree is intended to apply to all open cases. Any deviating approach taken in previous decrees will no longer be valid.

Nevertheless, it remains questionable to what extent such multiple taxation withstands a constitutional review. Even if different companies are taxed, the additional economic burden on the group and the largely random level of taxation seem incompatible with the principle of equal treatment and the ability-to-pay taxation principle.

Conclusion:

Double allocation for real estate transfer tax purposes can significantly increase real estate transfer tax risks and transaction costs in share deals and lead to double taxation of the same piece of real estate with real estate transfer tax. Therefore, prior to the transaction, it is essential to examine in detail whether properties could be attributed to other companies within the group for RETT purposes. This real estate due diligence is complicated by the inclusion of transactions where tax was ultimately not assessed due to Article 16 sec. 4a RETTA, while it remains uncertain whether this perspective should apply indefinitely to past transactions beyond the introduction of Article 16 sec. 4a RETTA.

Since the decrees are to be applied to all open cases, it may also be necessary to review already completed transactions/restructuring measures for aspects related to real estate transfer tax.