RETT triggered upon acquisition of shares can be deducted immediately

In a recently published decision, the Federal Tax Court (BFH) ruled that the real estate transfer tax (RETT) triggered in the case of a direct or indirect unification of 95 % or more of the shares in a corporation in the hands of a single acquirer is to be treated as a business expense that can be deducted immediately (case reference: I R 2/10). Contrary to the position taken by the German tax authorities, the RETT triggered in such cases does not have to be capitalized as an acquisition cost of the shares in the company acquired.

In the case, the RETT was triggered by a contribution of shares to a company that resulted in the indirect ownership of 95 % or more of the shares in a company that owned German real estate. Even though the taxpayer capitalized the RETT triggered in the German GAAP accounts, it treated the RETT as an immediately deductible business expense in its tax books. The tax authorities disallowed the deduction, and the taxpayer appealed to the lower court of Düsseldorf, which upheld the decision of the tax authorities.

The BFH overruled the decision of the lower tax court and held in favor of the taxpayer on the grounds that the acquisition cost of the shares could only be comprised of costs that were incurred with the objective to acquire the shares. The fact that the acquisition of the shares triggers the RETT was not held to be sufficient. Given that the RETT Act (GrEStG) deems the acquisition of a real estate-owning entity to be tantamount to the acquisition of real estate itself in certain cases, the BFH held that this deemed treatment for RETT purposes was not sufficient to warrant treatment as an acquisition cost of shares for income tax purposes.

In addition, according to the BFH, the fact that capitalization of RETT as an acquisition cost may lead to an overstated acquisition cost in cases where the taxpayer already owns a significant portion of the shares and only acquires a small additional shareholding which then brings the taxpayer over the 95 % threshold is a valid reason to treat the RETT as an immediately deductible business expense.

The tax authorities have not yet responded to the decision. Taxpayers should review critically whether their tax assessment could be changed following the decision of the BFH. Also taxpayers who were subject to RETT on the basis that 95 % or more of the interests in a partnership were directly or indirectly transferred over a period of 5 years should review previous tax assessments, as the BFH decision indicates that the underlying arguments may be the same.
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