On July 9, 2014, the German Supreme Fiscal Court decided a real
estate transfer tax ("RETT") case that shines a new light
on RETT structures. Contrary to the long-standing interpretation of
the law, the court took the position that aspects of economic
ownership are also relevant for RETT purposes.
Until now, it was the unanimous agreement of tax experts in
literature, legislation, and courts that for RETT purposes, the
civil law position and structure determines whether or not RETT is
triggered in a transaction. Now the Supreme Fiscal Court has held
that in cases where the law refers to indirect transfer of a
property, the civil law structure is not relevant alone. In such a
case, the rules stipulating economic ownership approach might be
The case dealt with a very common GmbH & Co. KG structure.
The limited partnership owned real property. Two individuals held
the GmbH, which was the general partner in the partnership. The
general partner GmbH held no participation. In addition, the two
individuals were the limited partners. Both partners sold their
interests in the partnership except for a small interest of 5.6
percent, which was kept by one partner. The shares in the general
partner GmbH were sold as well. Since less than 95 percent of the
partnership interest was sold, no RETT incurred.
Several weeks after the sale, the partners in the transaction
agreed on put and call options on the last 5.6 percent, agreed on
the purchase price, and transferred the profit participation right
immediately. The purchaser was granted power of attorney for
representing the last partner, who still held the 5.6 percent.
This deal structure was evidently put in place to avoid the
incurrence of RETT because under civil law principles, only 94.4
percent of the partnership interest was sold so that no RETT was
incurred. This strategy was recognized by the Lower Fiscal Court.
The Supreme Fiscal Court, however, overruled the Lower Court and
argued that in the case of an indirect transfer of property, the
civil law position might not apply in all cases. This is
particularly true in cases such as the one at hand, where the
purchaser of a partnership interest is able through multiple
agreements to control the property, has the opportunity and risks
of the property, and has a legal position similar to ownership.
Since real property transactions are in many cases structured as
a sale of partnership interests, including a retention of 5.1
percent of partnership interest, the new decision plainly puts the
focus of the tax authorities on an economic ownership approach.
Therefore, agreements in connection with the transfer of a
partnership interest that put a purchaser in the position of an
economic owner must be avoided.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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