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Tax authorities issue guidance on the attribution of real estate for RETT purposes
Guidance could result in additional compliance burdens and even double taxation
In a decree dated 16 October 2023 (the “real estate attribution decree”), the German tax authorities provided their interpretation on recent real estate transfer tax (RETT) landmark decisions from the federal tax court (BFH), which are dated 1 December 2022 and 14 December 2022. The guidance adopts the principles as described by the BFH and also establishes new criteria and approaches regarding how to assess whether a RETT triggering event took place. The main focus of the guidance is on the attribution of the ownership of real estate and fictitious taxable events for RETT purposes under section 1 (2a) – 1 (3a) of the RETT Act. Based on the view of the tax authorities, there are scenarios in which the ownership in the same piece of real estate might be attributed to multiple entities at the same time (e.g., in multi-level shareholding structures), which could potentially trigger RETT more than once.
RETT is a transfer tax levied on the transfer of German real estate, shares in German real estate-owning corporations, and interests in German real-estate owning partnerships. The assessment is generally based on the fair market value according to tax valuation rules, with the tax rate varying between 3.5% and 6.5% depending on the federal state where the real estate is located. RETT generally is triggered in the following cases:
- Direct sales or transfers of legal ownership in German real estate;
- Certain specific transfers of economic ownership in German real estate;
- Direct or indirect changes in ownership of 90% or more of the shares in a German real estate-owning corporation or of the interests in a German real estate-owning partnership within a 10-year period; and
- Direct or indirect first-time combinations of 90% or more of the shares in a German real estate-owning corporation or of the interests in a German real estate-owning partnership in one shareholder/partner.
Limited exceptions may apply for certain intragroup restructurings.
Decree on the attribution of real estate for RETT purposes
For purposes of the RETT rules, it is key to determine which entity is considered to be a real estate-owning entity. First and foremost, this should be the entity that actually acquired the real estate assets and shows such assets in its balance sheet. However, it is a long-standing principle of the RETT rules that the qualification as a real estate-owning entity does not necessarily follow civil law attribution or economic ownership principles under section 39 of the General Tax Code but must be determined exclusively based on RETT principles. The correct determination of a real estate-owning entity is of particular relevance in the application of the RETT rules to direct and indirect transfers of shares in corporations and direct and indirect transfers of interests in partnerships (section 1 (2a) – 1 (3a) RETT Act).
In the real estate attribution decree, the tax authorities describe how they apply attribution principles for RETT purposes. In line with BFH jurisprudence, the real estate attribution decree confirms that whether an entity is considered to own real estate must be determined based on the principles of the RETT rules. The attribution of real estate ownership in terms of legal or economic ownership is not decisive for the application of the RETT rules. In addition, the real estate attribution decree points out that real estate first is attributed to the entity that realized a (deemed) acquisition event with respect to the underlying real estate in terms of the RETT rules (referred to as a “real estate-holding entity”). Typically, this would be the legal owner of the underlying real estate, but the attribution might differ based on the specific facts and circumstances, which must be analyzed based on the principles of the RETT rules.
The real estate attribution decree then points out that real estate also may be attributed to an additional entity if that entity directly or indirectly acquired or combined for the first time 90% (before 1 July 2021: 95%) or more of the ownership in the shares/interest in the real estate-holding entity or is deemed to have done so (referred to as a “fictitious real estate-holding entity”). According to the real estate attribution decree, an entity is no longer considered to be a fictitious real estate-holding entity if:
- The real estate is no longer attributed to the real estate-holding entity (e.g., the underlying real estate is sold by the real estate-holding entity);
- Another entity becomes the fictitious real estate-holding entity; or
- The direct/indirect shareholding in the real estate-holding entity falls below the relevant threshold (currently 90%).
A-GmbH has two shareholders, B-GmbH and C-GmbH, with each owning 50% as from the formation of A-GmbH in 2010. B-GmbH is wholly owned by X-GmbH. A-GmbH acquired a building in 2022 and properly paid RETT. B-GmbH and C-GmbH do not own German real estate. In this example, A-GmbH is considered to be the real estate-holding entity for RETT purposes (and B-GmbH and C-GmbH are not considered to be fictitious real estate-holding entities).
On 1 January 2023, B-GmbH acquires the 50% shareholding in A-GmbH from C-GmbH. As a result, the shares in A-GmbH (the real estate-holding entity) are combined for the first time at 90% or more at the level of B-GmbH. This would be considered a RETT triggering event based on section 1 (3) of the RETT Act; therefore, RETT would be triggered at the level of B-GmbH. According to the real estate attribution decree, the real estate of A-GmbH is now fictitiously attributed to B-GmbH, as a RETT triggering event took place at the level of B-GmbH. B-GmbH now would be considered a fictitious real estate-holding entity, and A-GmbH would still be considered a real estate-holding entity. The real estate is effectively attributed to both, A-GmbH and B-GmbH, at the same time for RETT purposes.
Under the attribution mechanism of the real estate attribution decree, multiple entities within a shareholding chain could be considered real estate-owning entities for the same piece of real estate, which could result in multiple RETT triggering events for the same transaction if 90% or more of the shares/interest in the fictitious real estate-holding entity are transferred to a new shareholder (e.g., through a sale of shares or a merger into another surviving entity). Furthermore, based on the principles as described above, RETT also could be unexpectedly triggered in transactions that result in the removal of entities within the shareholding chain.
In the following continuation of the previous example, 100% of the shares in B-GmbH are sold to unrelated parties, Y-GmbH and Z-GmbH, on 1 December 2023, with 50% sold to Y-GmbH and 50% sold to Z-GmbH.
Following the logic of the real estate attribution decree, RETT should be triggered at the level of A-GmbH due to the fact that 90% or more of the shares of A-GmbH, the real estate-holding entity, are indirectly transferred to the new shareholders, Y-GmbH and Z-GmbH. Furthermore, due to the fact that 90% or more of the shares in B-GmbH, the fictitious real estate-holding entity, are directly transferred to the new shareholders, Y-GmbH and Z-GmbH, RETT should also be triggered at the level of B-GmbH, resulting in RETT being triggered twice for the same transaction. The tax authorities must be notified of both RETT triggering events within a two-week period and must be presented with information about the transaction, the parties involved, and the real estate owned. The attribution of real estate to A-GmbH, as the real estate-holding entity, and B-GmbH, as the fictitious real estate-holding entity, continues after the transaction.
As outlined above, the real estate attribution decree introduces the concept that multiple entities can be considered real-estate owning entities at the same time for the same underlying real estate. Due to the attribution of ownership of the same piece of real estate to multiple entities, there are scenarios in which RETT might be triggered multiple times for the same transaction. The real estate attribution decree, therefore, has far-reaching implications for taxpayers and tax practitioners.
Groups with multi-level shareholding structures with German real estate should review whether transactions that have occurred in the past could have resulted in the ownership attribution of real estate to a fictitious real estate-holding entity in the shareholding structure based on the principles of the real estate attribution decree. From a practical perspective, this would require an analysis as to the history of the real estate transaction in order to determine which entities in the group might qualify as fictitious real estate-holding entities. This could be challenging, as this requires information for periods in the past that might no longer be available.
For any future or ongoing transactions/reorganizations involving the direct/indirect transfer of shares/interests in entities with German real estate, careful analysis and planning may be required to avoid unforeseen situations and to file correct RETT notifications with the tax authorities (multiple notifications might be required in ambiguous situations). For reorganizations in the past which are not yet time-barred under the statute of limitation, it should be reviewed whether additional filing requirements result from the principles outlined in the real estate attribution decree.
The attribution of the ownership of real estate to multiple entities, as outlined in the real estate attribution decree, is highly controversial and debated in German tax literature, and there is doubt as to whether some of the principles are in line with the German constitution. However, the principles as described in the real estate attribution decree are binding on the tax authorities (but not on taxpayers or tax courts) and apply to all open cases. Increased scrutiny and challenges by the tax authorities can be expected in this regard. If the tax authorities assess RETT multiple times for the same transaction, further administrative actions should be considered.
Multiple amendments to the RETT rules in mid-2021 had already led to a significant increase in the complexity of the rules. The real estate attribution decree now adds another level of complexity, with potentially significant practical implications. A more fundamental overhaul and reform to the RETT rules is urgently needed. Plans for RETT reform, as provided by the Ministry of Finance in a discussion draft dated 15 June 2023, would be welcomed by taxpayers and provide for RETT rules that are significantly less complex and easier to administer.
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Client Service Executive | ICE - German Tax Desk
Client Service Executive | ICE - German Tax Desk