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The German 1997 Annual Tax Act

The German 1997 Annual Tax Act (Jahressteuergesetz 1997) was enacted into law in December of 1996 and has since entered into force. Most, but not all, of its provisions take effect on 1 January 1997. Please note that this article is one of a 14-part set of articles describing the 1997 Annual Tax Act.


The real estate transfer tax rate increases from 2 % to 3.5 % for all taxable events occurring after 31 December 1996.

Furthermore, in those cases in which the standard assessed value of the real property in question used to be the base to which the tax rate was applied, the amended law provides that the tax base will be the real property value as determined under the new Tax Valuation Act (sec. 138 ff. BewG 1997 - see Part VI above). This results in a higher tax base compared with the old system. The taxable events involved are the unification of all shares in a company in the hands of a single person (or related parties) and transactions in which no consideration can be determined (other than gifts and inheritances, which are exempt from real estate transfer tax as a general matter). In addition, the new legislation provides for application of the new higher real estate values to reorganisations under the Tax Reorganisation Act, to contributions of real property to companies, and to other acquisitions based on company law transactions. In conjunction with the higher tax rate, the higher tax base in these situations will result in markedly increased taxation of transactions in which the consideration received (the purchase price) is not the basis to which the tax rate is applied.

Since revision of the Business and Tax Reorganisation Acts in 1994, controversy has surrounded the issue of whether reorganisation of a partnership as a corporation and vice versa (so-called conversions of legal form) triggered real estate transfer tax on the real property owned by the entity being reorganised. The case against imposition of the tax was based on sec. 202 par. 1 UmwG, which assumes that the company undergoing conversion continues to exist and merely dons another "legal cloak". While the 1997 Annual Tax Act does not resolve this controversy, a ruling recently handed down by the Federal Tax Court (BFH DB 1997, 79 - 4 Dec. 1996) holds that reorganisations of this type are not subject to real estate transfer tax. There are indications, however, that the tax authorities may not be willing to follow this ruling (see directive Baden-Wuerttemberg of 23 January 1997 - BB 1997, 299).

The new law adds a new taxable event to the list of transactions triggering real estate transfer tax. From 1 January 1997 on, a complete or material change in the composition of the partners of a partnership will cause real estate transfer tax to become due if the change takes place within a period of 5 years (sec. 1 par 2a sent. 1 GrEStG 1997). A material change in ownership composition always occurs if a minimum of 95 % of the ownership interests change hands within the 5 year reference period. If the shift in ownership interests is less than 95 %, this can still constitute a material change ownership if the economic reality of the situation is equivalent to a conveyance of ownership to the real property in question.

This article is one of a 14-part set of articles entitled "The German 1997 Annual Tax Act" in which we have endeavoured to provide a useful overview of what we consider to be the major changes made in the German laws by the 1997 Annual Tax Act and, more selectively, by other recent legislation. To access the other articles in the set please enter 'The German 1997 Annual Tax Act', 'KPMG Tax Advisers' and 'Business Monitor'. We are of course at your disposal to discuss in depth the ramifications of new provisions which are of particular interest to you.

Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.