Quite frequently, real estate transfer tax ("RETT") considerably adds to the complexity of corporate transactions and reorganizations involving the direct or indirect acquisition of a certain quorum of shares in companies with German real property or the merger of such companies. The RETT assessment basis for these transactions is derived from the so-called substitute assessment basis pursuant to Section 8 II RETT-Act. The substitute assessment basis typically leads to a significantly lower RETT basis than the regular assessment basis (Section 8 I RETT-Act), which applies in case of a direct sale of real property. By decision dated June 23, 2015, the Federal Constitutional Court adjudicated that the substitute assessment basis violates the constitutional principle of equal taxation (Art. 3 I of the German Constitution). The German legislator is now required to remedy the discrimination by passing new rules for the substitute assessment basis no later than on June 30, 2016, with retrospective effect as of January 1, 2009.
Pursuant to Section 8 I RETT-Act, the regular assessment basis for RETT is the consideration - e.g., the purchase price - for an acquired property. In case of certain share transfers and mergers, however, the RETT-Act provides that the socalled substitute assessment basis pursuant to Section 8 II RETT-Act applies. The substitute assessment basis operates with specific valuation principles (Sections 138 et. seq. of the Valuation Act). For instance, in case of developed land these valuation principles would provide that the RETT basis is 12.5 times the agreed annual rent, reduced by a lump sum impairment for age. In practice, the substitute assessment basis often leads to significantly lower values than the regular assessment basis.
In 2011, the constitutionality of the substitute assessment basis was challenged by a taxpayer in court proceedings in front of the Federal Tax Court. The taxpayer argued that the substitute assessment basis violated the German constitution since it resulted in random and arbitrary values. The Federal Tax Court, convinced of the unconstitutionality of the substitute assessment basis, referred the case to the German Constitutional Court pursuant to the preliminary ruling procedure provided in Art. 100 of the German Constitution.
The German Constitutional Court confirmed the position of the Federal Tax Court and adjudicated that the substitute assessment basis in fact violates the principle of equal taxation derived from Art. 3 I of the German Constitution based on the following reasons: Tax Law Germany July 2015 Our Expertise Tax Law 2 Hot Topics The value derived from the substitute assessment basis differs significantly not only in average but also in many individual cases from the value of the regular assessment basis, which in most cases reflects the fair market value.
This discrepancy is not consistent with the principle of equal taxation and cannot be justified by policy aims and/or non-fiscal objectives of promotion, direction and/or encouragement.
The Federal Constitutional Court imposed on the German legislator the obligation to remedy the discrimination by passing new rules for the substitute assessment basis no later than on June 30, 2016. These rules shall become effective with retrospective effect as of January 1, 2009. With respect to RETT-able transactions prior to January 1, 2009, the current rules governing the substitute assessment basis will remain in effect.
Implications for Taxpayers
As a result of the decision of the German Constitutional Court it is to be expected that the substitute assessment basis will be amended such that the value derived from the substitute assessment basis will come closer to the fair market value of the real property involved in the RETT-able transaction. In response to the decision of the German Constitutional Court, the German legislator may, for instance, consider determining the substitute assessment basis by reference to the valuation principles of the German inheritance and gift tax. Because the new rules will come into effect with retrospective application, the consequences of the expected amendment should already be taken into account in the planning of ongoing transactions. As regards RETT assessment notices issued in the past, the following principles will apply:
- RETT assessment notices issued in relation to transactions that occurred prior to January 1, 2009 will not be affected by the new legislation.
- RETT assessment notices issued in relation to transactions that occurred on or after January 1, 2009 should generally not be affected by the new legislation, provided that the respective assessment notice has already become non-appealable and the new rules do not lead to a lower RETT (Section 176 of the General Tax Code). Certain exceptions, however, apply for tax assessments against which the taxpayers appealed.