The Finance Ministries of the Federal States have recently released harmonised decrees (dated 16 October 2023) providing guidance on the attribution of German real estate for German Real Estate Transfer Tax (RETT) purposes (the Attribution Decree).
As there was previously only very limited guidance from the tax authorities on the attribution of German real estate assets for RETT purposes, the publication of the Attribution Decree was highly anticipated. However, the Attribution Decree now published has not lived up to expectations: it does not simplify the attribution of real estate assets for RETT purposes, but rather creates substantial legal uncertainty. According to the Attribution Decree, the attribution of the same real estate asset to more than one entity in multi-tiered shareholding structure is possible. The Attribution Decree explicitly states that, as a result of such multiple attribution of the same German real estate asset for RETT purposes, a share deal might trigger multiple RETT events at different levels across the shareholder chain – something which could trigger RETT more than once.
Double taxation in multi-tiered company structures possible pursuant to German tax authorities
The Attribution Decree describes the following (simplified) scenario where multiple attribution leads to double taxation:
- In year 1, a German limited partnership (KG) acquires all the shares in a German limited liability company (GmbH) which owns German real estate. At the level of the KG, the shares in the GmbH are unified, triggering RETT. Because of the unification of the shares in the GmbH at the level of the KG, the real estate asset is attributed for RETT purposes to the KG as well as to the GmbH.
- In year 2, the partners of the KG sell and transfer their interest in the KG – that is, all partners of the KG are replaced. According to the Attribution Decree, the transfer of (more than 90% of) the interest in the KG to new partners triggers RETT at the level of the KG, and because the replacement of all partners is considered an indirect transfer of (more than 90% of) the shares in the GmbH, RETT is also triggered at the level of the GmbH.
The Attribution Decree explicitly states that due to the multiple attribution of the same German real estate asset to different entities, the replacement of the partners in year 2 triggers RETT twice in respect of the same underlying real estate.
Watch out: Impact on share sales
Given the extensive implications of the principles governing the attribution of German real estate assets in shareholding structures pursuant to the newly-released Attribution Decree, the German tax authorities will likely focus on this aspect in share sales in the future. The following aspects need to be considered very carefully in particular:
- The multiple attribution of German real estate assets to more than one entity leads to practical difficulties. In the future, it will be even more complex to predict the potential RETT consequences of share sales in multi-tiered company structures. In principle, tax due diligence for a share sale should consider the entire "RETT history" for each property looking back to the point in time when the property itself was acquired in an asset deal subject to RETT, but that may be challenging from a practical perspective.
- In the case of a share sales, it is essential for the relevant parties and investors to determine in a reliable manner whether and at which level RETT will be triggered by the contemplated transaction. The practical difficulties regarding the application of the attribution concept make RETT compliance even more difficult, as well as creating the risk of multiple RETT events.
- Based on the Attribution Decree multiple RETT notifications will likely be required.
- The tax authorities will apply the Attribution Decree to any open case. As such, the implications of the Attribution Decree for share sales prior to 16 October 2023 need to be analysed.
In our view, the multiple attribution of the same German real estate asset to different entities seems rather problematic. If the tax authorities impose RETT more than once on the same share sale, clients should consider challenging such RETT assessment.
If you would like to discuss the issues raised in this blog post, please get in touch with the authors or your usual Freshfields contact.