The assignment of rights under a share purchase agreement (SPA) between signing and closing in M&A transactions was impeded if a target company held German real estate as it was uncertain in the past whether in these cases German real estate transfer tax (RETT) is triggered twice. The German Federal Tax Court (FTC) ruled in its decision of 12 May 2016 that in these scenarios the transfer of rights under the SPA is not subject to RETT.
In M&A transactions, it is not uncommon that the company acquiring a target company (AcquiCo) is either not yet established or identified at the time of the signing of the SPA and thus not party to the SPA. Hence, the SPA is often signed by another company within the group of the purchaser (to act as a placeholder) and the contractual rights under the SPA are assigned from the placeholder to the AcquiCo before closing.
In the past, the assignment of the rights under the SPA to the AcquiCo was complicated if one or several of the target companies held German real estate and if 95 percent or more of those companies were transferred (Real Estate Companies). Often the German tax authority took the view that RETT is triggered twice in such scenarios, i.e. once at signing of the SPA between the seller and the placeholder and once when the placeholder transfers the rights under the SPA to the AcquiCo acquiring the Real Estate Companies.
Decision of the German Federal Tax Court (FTC) of 12 May 2016 – II R 26/14
In its decision of 12 May 2016, which was published on 27 July 2016 the FTC had to decide on the following case:
Bank A held 100 percent of the shares in B-AG (a German stock company) which in turn was the sole shareholder of several corporations that held German real estate. Bank A signed a SPA with Bank C in order to sell the shares in B-AG and all its subsidiaries. Under the SPA Bank C was entitled to transfer the rights under the SPA to another company within its group. Prior to closing, Bank C appointed one of its subsidiaries to acquire the shares in B-AG.
The German tax authority issued two RETT assessment notices, one to Bank C in connection with the signing of the SPA and one to the subsidiary in relation to the transfer of the rights under the SPA between Bank C and the subsidiary. The subsidiary appealed the RETT assessment notice, arguing that the transfer of the rights under the SPA does not trigger RETT. Neither the appeals process, nor the action filed before the Local Tax Court was successful. Ultimately, an action was filed before the FTC.
Decision of the FTC
The FTC ruled that the transfer of rights under a SPA to acquire shares in Real Estate Companies does not trigger RETT. The judges elaborated that even though the initial establishment of the claim to acquire the shares in the Real Estate Companies, i.e. the signing of the SPA, is subject to RETT pursuant to sec. 1 para. 3 no. 3 of the German RETT Act the transfer of the claims under the SPA does not fall within the ambit of the provision. The transfer of the contractual rights is rather an interim transfer (Zwischengeschäft) which is not subject to RETT.
Consequences for practice
The decision is to be welcomed as it makes the execution with placeholder companies more practical and clearly contradicts the view of the German tax authority to treat the transfer of rights under a SPA to other group companies a transaction being subject to German RETT. Consequently, there is legal clarity now that in the above described transactions RETT should only be triggered once, i.e. at the signing of the SPA.
However, considering that the decision of the FTC was based on a case in which the German real estate was held by corporations, the principles of the decision cannot simultaneously be applied to cases in which the real estate is held by partnerships, given that the RETT treatment of the transfer of partnerships differs from the treatment of the transfer of corporations. Even though, the FTC decision provides good arguments that the transfer of rights to acquire real estate owned by partnerships should also not be subject to RETT, in practice, these cases should be carefully considered on a case by case basis.