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A regrettable feature of the new German reorganisation law which has been in effect since 1995 is that the Tax Reorganisation Act contains no exemption from real estate transfer tax in connection with the numerous types of reorganisations it otherwise permits to occur tax free (see German News no. 2/1995, p. 2 ff.). Nevertheless, a substantial part of the scholarly opinion has always maintained that, even without a specific exemption provision for real estate transfer tax, the conversion from corporate to partnership form and vice versa should not trigger real estate transfer tax on the real property belonging to the entity being reorganised. The argument runs that such transactions do not involve the passage of title to real property from one legal entity (Rechtstraeger) to another because, at least under the new Commercial Reorganisation Act, there is no discontinuity of legal identity when a corporation reorganises itself as a partnership or vice versa. In other words, the corporation and partnership have the same legal identity and merely possess a different legal constitution.
A case posing this issue was recently the subject of a much-noticed interlocutory decision by the Second Chamber of Germany's highest tax court (BFH BB 1997, 137 - 4 Dec. 1996). The case involved the assessment of real estate transfer tax by the tax authorities on the real property held by a corporation (GmbH) which converted to a commercial limited partnership (here, a GmbH & Co. KG). Ruling on an appeal taken by the taxpayer against the refusal of the lower court to compel the tax authorities to stay collection of the tax pending the outcome of the case on the merits, the Federal Tax Court held that a stay of execution must indeed be granted because the correctness of the assessment was subject to "serious doubt".
Under German tax procedure law, the tax authorities are required to grant, and the tax courts to order, a stay of execution on assessments the validity of which is open to "serious doubt" (sec. 361 AO, sec. 69 FGO). If execution is stayed, the taxpayer need only pay when a final decision has been rendered by the courts. If the taxpayer loses, the assessment is of course subject to the normal interest provisions.
In granting the stay of execution, the Federal Tax Court expressed itself in unusually straightforward language. While all the court had to decide was whether "serious doubt" existed, it voiced decided opinions in favour of the taxpayer on the substantive issues. There is accordingly a consensus that, should the lower court rule against the taxpayer on the merits, the Federal Tax Court would reverse on appeal.
The Court based its decision primarily on a provision in the Commercial Reorganisation Act (sec. 202 par. 1 no. 1 UmwG): "The legal entity converting to another legal form continues to exist in the legal form specified in the conversion resolution". The essential argument advanced by the tax authorities was that the property of a corporation is held by the corporation as legal entity, whereas the property of a partnership is held by the partners as a form of joint property. The case may thus be broadly understood as a German chapter in the long dialectic of the entity and aggregate theories of partnership.
While the ruling by the Federal Tax Court has left commentators confident as to how the Court would decide on appeal if it had to, there is uncertainty as to whether the tax authorities are willing to acquiesce in this matter. The tax authorities in Baden Wuerttemberg issued a formal notice of non-acquiescence in response to the ruling here reported on (BB 1997, 299 - 23 Jan. 1997), directing tax officials under their jurisdiction to continue to assess real estate transfer tax on the type of transaction at issue. The directive states, however, that a stay of execution is to be granted upon request. It also intimates that the matter will be discussed when the representatives of the German state ministries of finance next meet to confer on transactional tax matters.
The directive may be interpreted more as a desire to "wait-and-see" than as an indication of adamant opposition to the position taken by the Federal Tax Court. For one thing, the authorities in Baden-Wuerttemberg appear to want to learn the positions of the other German states on this issue. For another, they may want to wait and see how the decision on the merits in fact turns out in the case here reported on. It is too soon to say how the matter will end. Complete refusal to acquiesce would compel more litigation and conceivably involve another Chamber of the Federal Tax Court. It could also signal a forthcoming change in the law. It is also possible, however, that after conferring among themselves and reading the grounds of the decision on the merits, the tax authorities will accept the ruling after all.
It should be noted that controversy exists only as to the consequences of a conversion between corporate an partnership form. Reorganisation of a partnerships as a different type of partnership and of corporations as a different type of corporation do not give rise to real estate transfer tax on real property belonging to the entity being converted because they indisputably do not involve changes in legal identity.
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