I. Current developments in the field of real estate transfer tax

We already discussed the planned reform of the Real Estate Transfer Tax Act in the honert newsletter article of 21 June 2019. However, the legislative process was suspended in autumn 2019 and it is unclear when the heavily discussed tightening rules will be implemented.
On the other hand, there are practical innovations for internal group restructuring measures. The exemption provision of sec. 6a GrEStG can now be applied with legal certainty thanks to a new application decree issued by the tax authorities. By the way, the provision is not only applicable to big concerns but also in the case of less complex corporate structures, notwithstanding the often used term “corporate group clause (Konzernklausel)”.

II. Tax exemption for internal group restructurings

1. Development of legislation

Section 6a GrEStG, titled “tax concession for restructuring within a group”, provides for a tax exemption for internal group restructurings under the German Reorganization Act (Umwandlungsgesetz) as well as for comparable transactions in other EU/EEA countries. The legislative objective is to facilitate internal group restructurings and to counteract excessive taxation.
In the past, the problem with planning internal group restructuring in connection with sec. 6a GrEStG was accompanied by various uncertainties. Among other things, it was unclear for a long time whether the standard constituted state aid and thus had to be classified as contrary to European law. The discussions about the state aid character were ended by a ruling of the European Court of Justice on 19 December 2018 (cf. our honert newsletter article of 27 March 2019).
However, the fundamental interpretation of the provision was controversial from the outset. The tax authorities took a very restrictive view in their previous application decree on sec. 6a GrEStG of 19 June 2012. In contrast, literature and case law have assumed a much broader scope of application. Seven rulings of the BFH on the interpretation of sec. 6a GrEStG were issued in August 2019 (rulings of 21 and 22 August 2019). The tax authorities have now endorsed the conception of the BFH in the application decree on sec. 6a GrEStG dated 22 September 2020. The exemption provision will become considerably more important in practice, as the following application examples illustrate.
First of all, it is stated that the tax concession under sec. 6 a GrEStG is not related to the real property, i.e. it is not based on the whereabouts of the real property, but solely on the ownership structure. Any changes in the allocation of the properties under Real Estate Transfer Tax Law during the pre- and post-retention periods are therefore irrelevant.

2. The pre- and post-retention periods of sec. 6a GrEStG

The tax exemption pursuant to sec. 6a GrEStG requires that a controlling company and at least one dependent company participate in the reorganization transaction, whereby the participation of the controlling company in the dependent company (participation amount of at least 95%) must have existed or exist within five years prior to the legal transaction and five years after the legal transaction. The so called pre- and post-retention periods (Vor- und Nachbehaltensfristen) after sec. 6a GrEStG.
The fact that these deadlines have led to considerable uncertainties in the past is clearly evident in all those restructuring transactions in which a participating company either ceases to exist (e.g. in the case of a merger) or is created in the course of the transaction (e.g. in the case of a spin-off for new formation). In such cases, it is technically impossible to comply with the pre-retention and post-retention periods of sec. 6a GrEStG. As a consequence, only the spin-off and the demerger for absorption would be eligible, according to the wording of the provision.
This dilemma no longer exists. In the new application decree on sec. 6a GrEStG of 22 September 2020, it is explicitly clarified that the five-year pre- and post-retention periods have to be complied where factual possible. This means that, for example, in the case of a split-up/spin-off for new formation as well as demerger for new formation, the pre-retention period only has to be complied by the transferring company, but not by the newly formed company. Only in the case of a merger of two dependent companies (sister companies) is the pre-retention period to be complied with regard to both companies. The previously mentioned principles apply equally to the post-retention period. Thus, in the case of a merger for the purpose of absorption or new formation, only the absorbing legal entity is obliged to comply with the five-year post-retention period.
As a result, the merger and the spin-off to a newly established GmbH by the merger or spin-off process is favored, but the merger or spin-off to a (e.g. shelf) company acquired within the five years prior to registration of the merger/spin-off is not. This is not convincing in terms of the result, but should be taken into account when it comes to restructuring.

3. Requirements for the controlling company

Another problem in the application of sec. 6a GrEStG is the lack of an unambiguous definition of the participating legal entities mentioned in the wording of the provision. In the past, the tax authorities have used the concept of an entrepreneur as defined in the German Value Added Tax Act (Umsatzsteuergesetz). In addition, the tax authorities based the application of sec. 6a GrEStG on a composite concept.
These principles explicitly no longer apply. After many years of discussion, the tax authorities have also adopted the BFH’s conception on this point, according to which exemption from real estate transfer tax is not tied to a specific legal form. Thus, in addition to natural persons and legal entities, partnerships can also be “controlling companies” within the meaning of sec. 6a GrEStG. It is also irrelevant whether the controlling company holds the shareholding in the dependent company as private or business assets.
The only prerequisite is that the participating legal entity is economically active, whereby no high requirements are to be placed on the economic business operations of the controlling company. It is sufficient if the controlling company participates in the market through another company in a dependent company.
As a result, the clarifications on the part of the tax authorities regarding the legal entities involved within the meaning of sec. 6a GrEStG lead to a broader scope of application. For example, the merger of a company with an individual as its sole shareholder may be covered by the tax exemption.

III. Implications for consulting practice and outlook

The rulings of the BFH as well as the new application decree of the tax authorities provide legal certainty for the planning of internal group restructuring measures. In particular, the clarified questions of interpretation regarding the pre- and post-retention periods increase flexibility in the case of restructuring measures that are necessary for business reasons. Another positive aspect is the abandonment of the composite concept of financial management. The new application decree is to be applied in all cases that are still open.
Finally, reference should be made to the reform project already mentioned at the beginning. This provides the legislator with the opportunity to amend sec. 6a GrEStG and abolish currently existing but undesirable preferential treatment. Our honert newsletter will keep you up to date.