Court interprets clause broadly and rejects literal reading of statutory language.
In a series of seven decisions from August 2019 that were published on 13 February 2020, Germany’s federal tax court (BFH) ruled on the application of the real estate transfer tax (RETT) intragroup restructuring exemption clause. The BFH generally interpreted the clause broadly and rejected a literal reading of the statutory language, and its interpretation could allow more taxpayers to qualify for the exemption.
Under the current rules, RETT generally is triggered under the following circumstances:
It should be noted that changes have been proposed to the RETT rules and that the rules are likely to change with effect from 1 January 2021, or possibly sooner.
Under the existing RETT intragroup restructuring exemption, certain direct or indirect transfers of real estate or shares in real estate-owning entities are exempt from RETT. Among other conditions for the exemption to apply, the restructuring transaction must involve one controlling entity and one or more controlled entities (RETT group), and a direct or an indirect shareholding of at least 95% must exist between the RETT group members for the five years immediately before and after the transaction.
There has been controversy in the German tax literature over whether the conditions for the exemption must be interpreted based on the literal wording of the statutory language. Taken literally, the conditions could not be fulfilled where the transaction involves a merger (i.e., where the controlled entity is eliminated by way of an “upstream” or “side-stream” merger) or a demerger or “hive down” transaction (i.e., where the controlled entity is newly created) because the 95% shareholding either would not survive the transaction or would not exist before the transaction.
The BFH has now ruled on the application of the RETT intragroup exemption clause in a series of cases involving upstream mergers, a side-stream merger, a demerger, and a hive-down transaction. In its decisions, the BFH generally came to the conclusion that the RETT intragroup restructuring exemption must be applied broadly.
The cases in the series were linked and pending together because, in one case involving an upstream merger of a controlled entity into its parent entity (see GTLN dated 06/16/2017), the BFH had raised the question whether the intragroup restructuring exemption could constitute state aid by favoring certain undertakings (where there is 95% ownership and a merger transaction, compared to a regular sale). The BFH referred the case to the Court of Justice of the European Union (CJEU), requesting a preliminary ruling on the compatibility of the German RETT intragroup restructuring exemption clause with the EU state aid rules (see GTLN dated 06/16/2017). On 19 December 2018, the CJEU issued a decision confirming that the intragroup restructuring exemption does not constitute state aid because it prevents excessive taxation and relies on objective criteria in line with the objective and purpose of the German RETT law (see GTLN dated 12/19/2018).
Following the CJEU’s decision, the BFH resumed consideration of the cases in the series, including whether the conditions to qualify for the intragroup restructuring exemption must be interpreted based on a literal reading of the statutory language. The following observations can be made from the series of rulings issued by the BFH:
Affected taxpayers that have been subject to German RETT because the RETT intragroup restructuring exemption either was not applied or was denied by the German tax authorities should carefully reconsider the facts of their case. Based on the BFH’s decisions, taxpayers may consider filing an objection against the relevant assessments and claiming an exemption from RETT for any such restructurings, if they have not already done so.
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