Sec. 6a Real Estate Transfer Tax Act (RETTA) which has been introduced as part of the so-called Growth Acceleration Act in the beginning of 2010 provides for the possibility of a real estate transfer tax neutral reorganization of groups of companies. The new privilege is, however, quite narrow since it only applies to certain transformations pursuant to the Reorganization Act. As a result, Sec. 6a RETTA is currently not applied widely in practice. On 1 December 2010 the tax administrations of the German Federal States have now issued a coordinated circular relating to the application of Sec. 6a RETTA.
The new circular provides guidance for a couple of questions on the construction and application of Sec. 6a RETTA. However, open questions remain. Also, the tax authorities should have taken a more courageous approach in some respects in order to apply Sec. 6a RETTA more often in practice by way of a wider construction of the law.
First of all it is noteworthy that pursuant to the circular partnerships may generally qualify as dependent companies within the meaning of Sec. 6a RETTA (neutrality of legal form). That means that existing structures of groups of companies where partnerships are involved may be streamlined without incurring real estate transfer tax. That is of particular interest for structures which had to be maintained on an ongoing basis in order to avoid real estate transfer tax due to a so-called unification of interests.
Example: M-GmbH intends to acquire 100 percent of the shares in T-GmbH. For more than five years M-GmbH is a limited partner of a limited partnership (KG) holding 100 percent of the limited partnership interests; the general partner 100 percent of the shares in which are also held by M-GmbH does not participate in the assets of the KG. Prior to the contemplated acquisition of the shares in T-GmbH M-GmbH transfers the shares in the general partner to a third party. Thereafter, M-GmbH acquires 94 percent and the KG acquires 6 percent of the shares in T-GmbH. Finally, the KG will be merged into M-GmbH. Real estate transfer tax does not fall due.
In addition, the circular provides for the possibility to hive down real estate into a subsidiary corporation without incurring real estate transfer tax. Until now a real estate transfer tax neutral hive-down was only possible under Sec. 5, 6 RETTA if it was a partnership that was to acquire the real estate. Under the circular a hive-down into a corporation is possible also in cases where the acquiring entity “has come into existence as a result of a transformation pursuant to the Reorganization Act”. The mere fact that such corporation has only come into existence within the fiveyear- period of Sec. 6a RETTA is not harmful. However, this apparently does not hold true for other forms of formation such as a standard formation by way of contributions in cash or the acquisition of a shelf company although such formations do not materially differ from a formation as part of a transformation. Nevertheless, the limited solution offered by the tax authorities should in practice provide for sufficient room for maneuver as the hive-down may generally also be effected under the Reorganization Act even though that may be a more costly route in some cases.
Another positive statement of the circular is the clarification that the tax privilege of Sec. 6a RETTA should also be applicable in cases where the group company ceases to exist as a result of the transformation under the Reorganization Act; such a transformation should not qualify as a breach of the lock-up period.
On the downside, the tax authorities generally apply the same principles for indirect participations that govern Sec. 1 (3) RETTA although those principles do not fit. Based on those principles an indirect participation of at least 95 percent of an entity’s capital is given if there is at least a 95 percent participation at the level of each tier; thus, a subsidiary’s participation in another entity is not taken into account on a pro-rata basis. However, a change in the type of participation, for example, by way of shortening or lengthening of the chain of participations, shall not be relevant as long as the minimum participation of 95 percent in the capital of the dependent company remains in place. On that basis typical changes to the structure of a group are still possible without loosing the benefit of Sec. 6a RETTA.
The circular only provides for very limited guidance as to when a transformation under foreign law is “comparable” within the scope of Sec. 6a RETTA to a transformation under German law (in particular, there are doubts regarding jurisdictions using singular succession instead of universal succession such as many Anglo-Saxon jurisdictions). Also, the tax authorities did not bring themselves to extend the scope of Sec. 6a RETTA to a specific form of legal succession (Anwachsung) in case of partnerships which is often used in practice as an alternative to a formal merger. Therefore, given the wording of Sec. 6a RETTA and the corresponding statements in the circular, a formal merger will typically be the preferred route as long as it is an objective to maintain the benefits of Sec. 6a RETTA.