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The multi-tier group – Which is the controlling company and which is the dependent company?

In the event of intra-group restructuring, under certain conditions, it is possible to avoid real estate transfer tax (RETT) via the so-called corporate group clause in Section 6a of the German Real Estate Transfer Tax Act. The Federal Fiscal Court (Bundesfinanzhof, BFH) carefully considered this provision in a new ruling and, in doing so, clarified an open legal issue in this respect.

The claimant, itself a company, held an interest in a property-owning company. The claimant’s shareholder was, in turn, a GmbH [a German limited liability company] whose shares were held by an AG [a German joint stock company]. The shareholdings had existed for more than five years and amounted to 100% in each ease. In 2011, the property-owning company was merged into the claimant by which means the company’s properties passed over to the claimant. The respective local tax office granted the tax concession for this under the corporate group clause. In 2013, the AG sold more than 25% of its shares in the GmbH to a third party. The local tax office was of the opinion that the conditions for the tax concession had retrospectively ceased to be satisfied and accordingly issued an amended tax assessment. The tax court upheld the case against this.

The BFH, in its ruling of 28.9.2022 (case reference: II R 13/20) has now rejected the local tax office’s appeal on the grounds that it was unfounded; moreover, the court decided that the transfer of the ownership of the property – that was brought about by the merger – was admittedly subject to RETT, however, this acquisition was exempted from RETT under the rules of the corporate group clause. Under this regulation, RETT is not levied on taxable reorganisation transactions, in particular, if a so-called controlling company and a so-called dependent company are involved in the transaction. The requirement for this is that a shareholding of 95% has to have existed five years prior to and five years following the reorganisation transaction – it may also still exist. However, the prior and subsequent holding periods only have to be complied with if this is also possible on legal grounds.

The legal question at issue in this case, namely, in a multi-tier group of companies which one should be regarded as the controlling company and which one as the dependent company, had hitherto still been open. The BFH has now explained that this is solely determined by the respective reorganisation transaction for which, according to the corporate group clause, tax should not be levied. 

Example: If subsequently, for example, in a three-tier group of companies with parent, subsidiary and lower-tier subsidiary companies, the lower-tier subsidiary company is merged into the subsidiary company then, in the case of such a reorganisation transaction, the subsidiary company would be the controlling company and the lower-tier subsidiary company the dependent company. It is only in this relationship that there has to be a 95% shareholding prior to the reorganisation transaction. For that reason, the parent company’s shareholding in the subsidiary company is irrelevant.

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