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German Real Estate Transfer Tax Deductable In Share Transfer
As a rule the German real estate transfer tax (RETT) is triggered when the ownership in real property changes. This can also occur in cases where real property is indirectly transferred in a share deal. The RETT rate ranges between 3.5% and 5%. The German Supreme Fiscal Court has recently decided that RETT triggered in the acquisition of shares in corporations owning real estate, can be treated as an immediately deductible expense rather than additional acquisition costs of the shares. Taxand Germany reviews the decision.
In the basic scenario where a real property is directly acquired, the RETT triggered is qualified as incidental acquisition costs. As a result, RETT is not deducted for income tax purposes immediately but allocated to land and building. Expense deduction is therefore not at all possible for land and spread over the depreciation period of the building.
In the case a shareholder, after a transfer of shares, holds more than 95% directly or indirectly in a real property owning company, this also constitutes a RETT relevant transaction. The question whether in such cases the RETT to be paid by the shareholder also constitutes incidental acquisition costs of the shares or immediately deductible expenses have been controversially discussed in the past. The tax administration was taking the position that such RETT qualifies as incidental acquisition costs. Different Fiscal Courts took different positions in this regard. In its recent decision the German Supreme Fiscal Court ruled in a case in which an intercompany reorganisation led to a participation of over 95% of the shares in real estate holding company and held that RETT qualifies as immediately deductible expenses. The reasoning of the Court is that the definition of (incidental) acquisition costs for tax purposes is based on German GAAP. Neither under German GAAP nor for income tax purposes an acquisition of the real property has taken place. The RETT relevant transaction being a unification of more than 95% of the shares in the real property holding company, assumes a fictitious acquisition solely for RETT purposes. As for income tax purposes such a fictitious acquisition does not exist and no incidental acquisition cost may be assumed.
The decision of the Supreme Fiscal Court is based on a specific case in which no acquisition had taken place from a German GAAP and income tax perspective but solely base on RETT rules. It remains to be seen how the tax administration will react in future not completely similar cases. Furthermore, it is to be noted, that the case was on shares in companies. Share transfers of partnerships are covered by different regulations and do not directly benefit from the decision.
It is to be noted that the underlying transaction did occur in 2000. Since 2010 RETT exemptions for specific intercompany reorganizations were introduced allowing companies to restructure without triggering RETT if certain requirements can be met. When contemplation intercompany reorganization measures a potential exemption should be reviewed first before looking at the income tax treatment of the RETT.
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