The German legislator plans an amendment of sec 1 para 2a GrEStG (German Real Estate Transfer Tax Act) with retroactive effect. According to the draft bill of the “Gesetz zur Anpassung der Abgabenordnung an den Zollkodex der Union und zur Änderung weiterer steuerlicher Vorschriften“, the latest court decision of the BFH (German Supreme Tax Court) in connection with an indirect change of the partnership interest in a partnership owning German real estate should be overruled.

RETT is triggered, inter alia, if within a time period of five years at least 95% of the interests in a real estate owning partnership are transferred to new partners. This also applies to indirect transfers (for example if the interests in the real estate owning partnership are not transferred, but shares / interests in an intermediate-entity which in turn holds interests in the partnership owning real estate, are transferred). On 24 April 2013 the BFH (decree II R 17/10) decided that - contrary to the long-held opinion of the German tax authorities - such an indirect transfer is relevant for the purposes of sec 1 para 2a GrEStG only if the shares / interests of the intermediate-entity are transferred in their entirety (100%) to new owners and irrespective of whether the intermediate-entity is a corporation or a partnership.

The proposed change in the law will uphold the previous interpretation of the tax authorities. As far as an indirect transfer of interests in a real estate owning partnership is concerned, for the purposes of sec 1 para 2a GrEStG, a pro rata calculation should apply with respect to a transfer of the interests in an intermediate-partnership. With respect to an intermediate-corporation it should be decisive for a deemed transfer of the indirectly held partnership interest whether at least 95% of the share in such a corporation is transferred within five years (resulting in an imputed transfer of the entire interest of the corporation in the real estate owning partnership).

The amendment was to be expected. However, the amendment is proposed to have retroactive effect for indirect transfers of partnership interests which have taken place since 2002! Whether such retroactive amendment is consistent with German constitutional law is at least questionable and might be the subject of legal challenge.

Accordingly caution would seem advisable if an indirect transfer of interests in a real estate owning partnership is proposed which (based on the current decision of the BFH) is implemented with an expectation that this would not trigger RETT.