TAX NEWS - January 2010
New rules provide relief from Germany's real estate transfer tax for intragroup restructurings
Taxable events under the Real Estate Transfer Tax Act (RETTA) include both a direct transfer of real estate (via a sale, merger, etc.) and a transfer of shares (upon a sale, contribution, merger, etc.) that lead to an indirect change in the ownership of real property in Germany. In the latter case, real estate transfer tax will be triggered where there is a direct or indirect concentration of at least 95% of the shares in an entity (corporation or partnership) that owns German real estate in a single owner or a group of companies (unification of shares), or where there is a direct or indirect change of ownership of at least 95% in a real estate-holding partnership within a five-year-period (the "change of partners in a partnership" rule). The concept of "real estate" encompasses the legal ownership of property, inherited building rights and "building on land owned by another person."
RETTA section 1(3) (unification of shares) treats the owner of at least 95% of the shares in a corporation or partnership as if it owns the real estate of the corporation/partnership via the unification of shares in its hands or if the real estate is owned by a company that is located several tiers below the shareholder/partner (indirect unification of shares).
Real estate-owning partnerships also must comply with Real Estate Transfer Tax Act (RETTA) section 1(2a) (change of partners in a partnership). A partnership is regarded as a real estate-owning partnership if it directly owns the real estate and at least 95% of the shares of a real estate-owning corporation are directly and/or indirectly unified in its hands. Real estate transfer tax is triggered when there is a change in the direct and/or indirect partners within five years in a way that at least 95% of the shares in the partnership are transferred to new partners. In contrast to the unification of shares criterion (which tests whether shares are unified in a single person or a group of companies), a transfer of at least 95% of the partnership interests triggers Real Estate Transfer Tax even if the interests are transferred to several persons or entities. The change of ownership of at least 95% may be reached via one or more direct transfers of partnership interests to new partners, via one or more indirect transfers of partnership interests or by a combination of both within a five-year period. An indirect transfer is available if at least 95% of the shares in the partner are (directly or indirectly) transferred. In determining the five-year-period, all successive transfers of partnership interests are taken into account at each level of shareholding.
Where shares in a corporation or partnership interests are transferred, it is irrelevant for real estate transfer tax purposes whether the entity whose shares are transferred is tax resident in Germany. Thus, Real Estate Transfer Tax will be triggered by a transfer of shares in foreign entities if they directly or indirectly (through a lower tier entity) own German real estate.
Before the recent amendments, real estate transfer tax also applied to transfers of real estate within a group of companies and for the intragroup transfer of stakes of 95% or more in group entities directly or indirectly owning German real estate, only with one exception to the latter rule. In a group with several tiers of companies, the shortening of the shareholding chain (upstream transfer of shares) is not subject to real estate transfer tax if the upper tier entity directly or indirectly held 95% or more of the shares in the entity owning the real estate before the transfer. By contrast, a transfer of shares side-stream or down-stream or the insertion of an additional tier into the group structure generally triggers real estate transfer tax.
Tax Relief measures
Under the new provision in Real Estate Transfer Tax Act (RETTA) section 6a, the transfer of real estate, as well as events covered by Real Estate Transfer Tax Act (RETTA) sections 1(3) (unification of shares) and 1(2a) (change of partners in a partnership) are exempt from Real Estate Transfer Tax if they are part of a restructuring in section 1(1) 1-3 of the Reorganization Act (non-tax legislation dealing with corporate restructuring, etc.).
The specified restructurings are, in particular, a merger, de-merger, spin-off and hive-down. Intra-group restructurings involving a mere transfer (e.g. a sale), an exchange of shares or a contribution-in-kind will not qualify for the real estate transfer tax exemption because these transactions are not covered by the Reorganization Act. For these transactions, the old (strict) Restructurings under comparable rules in other EU/EEA Member States will qualify for the real estate transfer tax exemption provided the requirements - particularly with respect to the holding periods (see below) - are met. No relief is provided for intragroup restructurings in non-EU/EEA Member States (e.g. Switzerland and the U.S.).
The exemption will apply only to intragroup restructurings that involve a controlling entity and one or several controlled entities or only several entities controlled by a single controlling entity. A controlled entity for these purposes is an entity that was consolidated with at least 95% of the share capital (directly and/or indirectly) held by the controlling entity within five years before the restructuring and that will remain consolidated with at least 95% (directly and/or indirectly) held by the same entity for five years following the restructuring. Although not specifically stated in the law, the five-year holding period should not apply if the company was not in existence before the restructuring (e.g. in the case of a hive-down) or if the company no longer exists after the restructuring (e.g. in the case of a merger).
Example 1 - GmbH A owns 100% of GmbH B which, in turn, owns 100% of real estate-owning GmbH C. GmbH C is merged into GmbH B. The transfer of real estate via the merger should be exempt from real estate transfer tax provided at least 95% of GmbH C has been held by GmbH B for the previous five years. According to our understanding of the law, it is not a requirement that GmbH A hold GmbH B for five years after the merger.
Example 2 - GmbH A owns 100% of the shares in GmbH B and GmbH C. GmbH B owns 100% of the shares in GmbH D, which owns German real estate, and is a 100% limited partner in partnership E, which also owns German real estate. GmbH B is merged into GmbH C. The unification of shares in GmbH D in the hands of GmbH C and the change of partners in partnership E of at least 95% should be real estate transfer tax exempt provided GmbH B and GmbH C have been at least 95% held by GmbH A for five years before the merger and GmbH C will be held by GmbH A for five years after the merger. According to the new rules, no holding periods should apply for partnership E and GmbH D.
Example 3 - GmbH A owns 100% of the shares in GmbH B and in GmbH C, which owns German real estate. The shares in GmbH C are to be contributed to GmbH B. Until the end of 2009, the restructuring would have triggered real estate transfer tax due to the consolidation of shares at a new tier (GmbH B) (although this could have been avoided by contributing only 94.9% of the shares, with 5.1% of the shares in GmbH C retained by the current shareholder or acquired by an unrelated party). As from 1 January 2010, it is possible to opt for a spin-off of 100% of the shares in GmbH C from GmbH A to GmbH B; a spin-off is covered by the Reorganization Act and should qualify for the real estate transfer tax exemption.
Example 4 - GmbH A wants to set up a new subsidiary and contribute parts of its real estate into the subsidiary (for example, to qualify for the extended trade tax deduction to avoid trade tax at the level of GmbH A or to generate German GAAP equity for GmbH A). Previously, to avoid real estate transfer tax exposure, it was common to set up a partnership with GmbH A as the 100% limited partner because the transfer of real estate from a partner to its partnership is RETT-exempt to the extent the partner participates in the income of the partnership (profits, liquidation proceeds). However, there may be disadvantages to a partnership (e.g. with respect to VAT on intragroup services because a controlled partnership cannot participate in a fiscal unity for VAT purposes, or a fiscal unity for Trade Tax purposes). Under the new rules, real estate transfer tax on the transfer of real estate can be avoided if GmbH A sets up a corporation (GmbH B) and transfers the real estate via a hive-down to GmbH B.
GmbH A will have to hold the shares in GmbH B for five years after the hive-down. It should be noted that income tax consequences would need to be considered if the real estate contains hidden reserves. In principle, real estate as such does not qualify as part of a business, so the restructuring will not be covered by the Reorganization Tax Act.
The German real estate transfer tax law seems to be very strict compared to transfer tax rules in other jurisdictions, especially with respect to the fact that intragroup transfers (pure real estate and transfers of shares/interest in real estate-owning entities) are not exempt from real estate transfer tax. The new real estate transfer tax exemption for certain intragroup restructurings is a first step in the right direction.
However, the exemption is tied to restructuring activities covered by the Reorganization Act instead of relieving any transfer of real estate, shares and interests within a group of companies. In practice, the strict holding requirements will restrict the real estate transfer tax exemption to specific cases. Shares in real estate-owning corporations that hold shares/interest in real estate-owning corporations/partnerships will have to be owned for five years before and after the intragroup restructuring to qualify for the exemption. Taxpayers are further burdened because the new group definition for purposes of the real estate transfer tax exemption is different from the group definition for real estate transfer tax fiscal unity purposes, as well as from other group definitions (e.g. for income tax and for accounting purposes).