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Group Privilege Available for Multinationals Looking to Avoid the Increasing Rates for Real Estate Transfer Tax


Transfers of German real estate are subject to real estate transfer tax (RETT), not only in asset deals but, as a rule, also in many share deals - even intra-group. The rate used to be 3.5% nationwide, when in 2006 the German federal states (the L?nder) were entitled by law to assess the tax rate on their own. A couple of states already took this opportunity, and others - Brandenburg, Bremen, Niedersachsen and Saarland - have just increased their rate at the turn of the year. The new rates in the states are 4% or 4.5%, while the Land of Brandenburg is now heading the table with a rate of as high as 5%. Taxand Germany assesses whether Group Privilege will be advantageous to multinationals affected by the increasing rates of the Real Estate Transfer Tax.

While RETT used to apply even in intra-group transactions, often being the decisive obstacle to business driven reorganisation, RETT law now provides for a new group privilege. The new rules were enacted last year, but increasing tax rates make this opportunity even more topical than before.

Conditions to qualify for the group privilege are much tighter than the term implies.

Reorganisations that are not covered by the German Reorganisation Act are fully excluded from the privilege. Among those covered, other measures are mergers and split-offs, but straight-forward intra-group sales of the property itself or of the shares in the asset owning entity are not.

Cross-border reorganisations are privileged if the measures are covered by rules comparable to the German Reorganisation Act in a jurisdiction within the European Union or the European Economic Area. Steps involving, for example Swiss or US entities, do not benefit from the exemption at all.

Apart from this, waiting periods need to be fulfilled. At least 95% of the shares in the asset owning entity need to be held by the group for at least 5 years prior to the reorganisation measure and for at least 5 years thereafter.

Additional conditions need to be fulfilled by the top level entity within the reorganisation. Pure holding companies do not qualify, and neither do individuals holding their shares as private assets.

Taxand's Take

A decree has recently been issued by the authorities clarifying a number of issues. But still, the rules need to be used with utmost caution. In many cases they enable tax neutral reorganisations in multinational groups that would not have been tax neutral before last year. In other cases, however, multinationals need to avoid or mitigate RETT - or try to - on the basis of elaborated RETT blocking structures to be individually developed.

RETT rates have incresaed in some German states and this is an opportunity to point out possible privileges again. It is useful to note that EC mulitnationals are covered under the privilege.

Your Taxand contact for further queries is:
Frank Seidel
T. +49 69 27 2290

Taxand's Take Author