New instruction of the German tax authorities on the application of section 6a Real Estate Transfer Tax Act (RETT-Act)

So far, the exemption rule of the section 6a RETT-Act (tax concessions for corporate restructurings) was applied restrictively by the tax authorities. Due to that, the ambit of this rule was highly limited to the disadvantage of the taxpayer. 

With its seven judgments from the 21 and 22 August 2019, which were published on 13 February 2020, the Federal Fiscal Court has highly widened the ambit of section 6a RETT-Act to the advantage of the taxpayer. 

Since these judgments were published in the Federal Tax Paper Part Two (Bundessteuerblatt Teil II) on 22 July 2020 and became mandatory for the tax authorities, the tax authorities adapted their instruction on the application of section 6a RETT-Act to the jurisprudence of the Federal Fiscal Court.

The new instruction was published online on 22 September 2020 and still must be published in the Federal Tax Paper Part One (Bundessteuerblatt Teil I). This instruction is replacing the instructions from 19 June 2012 (BStBl I S. 662) and October 09, 2013 (BStBl I S. 1375) and applies to all outstanding section 6a RETT-Act cases.  

The outdated legal opinion of the tax authorities regarding section 6a RETT-Act was eliminated by the new instruction. Therefore, many debatable questions can now be answered positively for the taxpayers. 

The changes affect the determination of the dominating company, the observance of the prior and subsequent holding period and the use of the term “group” (Verbund).

In detail:

The instruction clarifies that all conversion/reorganization processes of section 6a RETT-Act will be treated equally. It does not depend on the direction of the conversion/reorganization process, so it does not matter whether the merger is vertical (conversion/reorganization on the side line so called sidestream-merger) to a sister company or horizontal (conversion/reorganization from bottom to top so called upstream-merger) to the parent company. Further, the conversion/reorganization merger of the parent company to a subsidiary (so called downstream-merger) is also privileged in section 6a RETT-Act. Thus, the tax authorities take over the Federal Fiscal Court decision (Az. II R 62/14) and put down the close interpretation of the term “group”.

In addition, spin-offs and split-offs which lead to an emergence of a subsidiary are now also privileged, as well as the merger of the last subsidiary involved in the conversion/reorganization process with the dominating company. The tax authorities hereby expressly join the Federal Fiscal Court decisions (Az. II R 36/14 and Az. II R 56/16).

Due to the decisions (Az. II R 62/14, II R 50/13, II R 63/14, II R 36/14, II R 56/15, II R 53/15, II R 58/14) the tax authorities changed its legal opinion on the determination of the dominating company in that way that section 6a RETT-Act applies to all economically operating entities.

A dominating company could be an economically operating natural entity, legal entity or non-corporate entity. It is sufficient for the dominating company to participate in the market via a shareholding (also over several shareholding levels) in a subsidiary. Against the previous legal opinion, it is not necessary anymore, that the dominating company in a conversion/reorganization needs to be an “entrepreneur” in purpose of section 2 VAT-Act (Value Added Tax Act). Furthermore, it does not matter whether the dominating company holds its shares in a subsidiary in its private or business assets. 

Beyond that, the tax authorities are adjusting their legal opinion regarding the prior and subsequent holding periods. In accordance with the Financial Fiscal Court decisions the prior and subsequent holding periods mentioned in section 6a sentence 4 RETT-Act only must be observed to the extent they legally can be in a tax privileged conversion/reorganization process. The instruction is mentioning some examples for clarification, in which the observance of the prior and subsequent holding periods is impossible and therefore unnecessary. It follows from this that the prior holding period of five years must not be observed if there are spin-offs or split-offs which lead to an emergence of a subsidiary. The subsequent holding period of five years must not be observed if there disappears an entity due to a merger or split-up.

The legislator has announced that he will react and adjust the so called “corporate group clause” (section 6a RETT-Act) as a part of the Real Estate Transfer Tax reform because of the Financial Fiscal Court decisions. Any details of the legislative considerations have not yet been communicated. Therefore, the nature and scope of any change is still completely unclear. It cannot be excluded however that it will come thereby for the taxpayers to a deterioration for the use of the privilege of the section 6 RETT-Act.

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