Purchaser’s knowledge of collaboration on the part of vendors is not required. Mere pre-planning, however, is not sufficient, rather a true building activity is required

In two recent decisions, the Federal Fiscal Court of Germany further developed its case law on the so-called joint basis of real estate transfer tax (einheitlicher Erwerbsgegenstand). In principal, RETT is assessed on the consideration for the real estate transfer; typically this is the purchase price. However, according to case law of the Federal Fiscal Court, specific rules may apply to transfers of undeveloped real estate. Hence, not only the purchase price, but also the value of other contracts connected with the transfer of undeveloped land form part of the RETT basis, if they economically lead to a transfer of developed rather than undeveloped real estate. For such cases the Federal Fiscal Court uses the term of a so-called “joint RETT basis”. A typical example is the conclusion of a transfer contract for a particular piece of real estate which is ready for construction together with a construction agreement and a fixed price for construction between vendor and purchaser. Here, both the construction costs as well as the purchase price form part of the RETT basis. Such case law has long been criticized and raises a considerable number of questions. Two of them have now been answered by the Federal Fiscal Court.

In the first case (file number II R 3/12) the court had to decide on the requirements of a joint RETT basis if not only one, but several parties take part in the transaction on the side of the vendor. In the case at hand the purchaser bought an undeveloped piece of real estate from a bank which was brokered by a subsidiary of the bank. After the transaction closed, the purchaser instructed a construction company with the construction of a building. However, the purchaser was not aware of the fact that the construction company and the bank’s subsidiary had entered into an agency agreement. Nevertheless, the Federal Fiscal Court held that purchase and construction contract both form part of a joint RETT basis because the bank’s subidiary and the construction company had effectively worked together. Pursuant to the court, it is immaterial whether the purchaser has knowledge of the collaboration on part of the vendor side or whether this was at least recognizable.

Such ruling is to viewed as a substantial and hardly understandable tightening of the court’s case law. In practice this means that prior to commissioning a construction company, purchasers of an undeveloped real estate should always seek a guarantee that there is no collaboration with the vendor whatsoever. In future, it will be much easier for the tax authorities to claim RETT in connection with a joint RETT basis, as the proof of an objective collaboration between parties on the vendor side is sufficient. A purchaser may no longer claim that it had no knowledge of a collaboration on part of the vendor.

The second ruling (file number II R 56/12) deals with the question of which what level do construction-related agreements have to reach in order to be included in a joint RETT basis. In the case at hand the vendor was involved in the construction pre-planning but not in the actual construction process. Here, the court ruled in favor of the taxpayer: Pre-planning work, regardless of its scope, does not qualify for a joint RETT basis. Instead, it is necessary that the vendor takes part in the actual physical changes to the real estate. In other words, the vendor must participate in the construction process. On this point, the decision of the Federal Fiscal Court provides certainty for future real estate transactions. It remains to be seen if that decision now marks the starting point for a more restrictive application of the concept of a joint RETT basis.