The tax administrations of the German Federal States have recently amended their coordinated decrees relating to the application of Sec. 1 (2a) Real Estate Transfer Tax Act (RETTA). In the following, we analyze one important new development relating to transfers of interest at the level of a partnership which itself holds a partnership interest in a real estate holding partnership.

Sec. 1 (2a) RETTA provides for a fictitious transfer of real estate where 95 percent or more of the interests in a real estate holding partnership are directly or indirectly transferred to new partners within a time frame of up to five years.

In the new coordinated decree the tax administration takes a new position on transfers of partnerships interest occurring not at the level of the real estate holding partnership itself, but at a higher level of the chain of participations. Until recently, the tax administration made no distinction in this regard between corporate entities and partnerships. In both cases, a transfer of shares or interests at the level of an intermediate entity was only taken into account if such transfer related to 95 percent or more of the shares or interests in the intermediate entity. If this was the case, all of the partnership interests held by the intermediate entity in the real estate holding partnership were taken into account for the calculation of the 95 % threshold at the level of the real estate holding partnership (no pro rata calculation).

Such traditional treatment shall forthwith only apply to intermediate corporate entities. By contrast, an intermediate partnership shall be viewed as a transparent entity. Its interests in a real estate holding partnership shall be attributed to its partners on a pro rata basis.

The new view has a significant impact on the so-called 94/6 structures frequently used. Where such structures are in place, even small participation shifts at the level of the intermediate partnership can trigger RETT from now on.

Example: The participations in a real estate holding SPV-KG (a Limited Partnership) are held by a General Partner holding no partnership interests and by X GmbH & Co. KG (also a Limited Partnership) as Limited Partner with a partnership interest of 100 percent. The participations in X GmbH & Co. KG are held by a General Partner holding no partnership interests and by Y GmbH as Limited Partner with a partnership interest of 100 percent. X-GmbH & Co. KG sells 94.9 percent of its partnership interests in SPV-KG to individual A. Two years later, Y-GmbH sells 10 percent of its participation in X-GmbH & Co. KG to individual B.

Consequence: The sale of the 94.9 percent interest in SPV-KG to A and of the 10 percent participation in X-GmbH & Co. KG to B qualify as a RETTable transfer of partnership interests under Sec. 1 (2a) RETTA as 94.9 percent of the partnership interests are transferred directly and 0.51 percent of the interests (10 percent*5.1 percent) are transferred indirectly to new interest holders within ttt the scope of Sec. 1 (2a) RETTA. This holds true irrespective of the fact the less than 95 percent of the interests in X-GmbH & Co. KG were transferred to new interest holders.