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 applicable.
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.