German Federal Fiscal Court: real estate transfer tax triggered by a change in shareholders is not deemed acquisition costs

The German Federal Fiscal Court (Bundesfinanzhof – BFH) published a positive decision for taxpayers in its judgment handed down on 2 September 2014 (IX R 50/13). If real estate transfer tax is triggered as a result of a change in the shareholder structure of a partnership, such tax constitutes an immediately deductible income-related expense (Werbungskosten) of the asset-management partnership in the case of dispute. Specifically, the case concerned the real estate transfer tax payable under Sec. 1 (2a) of the German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz - GrEStG). It is payable if the shareholder structure of a partnership holding real property in Germany directly or indirectly changes within five years in such a manner that at least 95% of the shares in the company’s assets are transferred to new shareholders. The Court held the view that, although the process is deemed a legal transaction aimed at the transfer of title to property to a new partnership, this only applies in the context of real estate transfer tax.

The German Federal Fiscal Court thereby disagrees with the view of the fiscal authorities which in such cases consider the real estate transfer tax to be part of either the incidental acquisition costs of the shareholding (Regional Finance Office (Oberfinanzdirektion – OFD) of Frankfurt am Main of 2 May 2013) or, alternatively, the acquisition costs of the shares in the real property (Regional Finance Office of Niedersachsen of 22 August 2013).

An argument against the assumption of real property acquisition costs is that, after the change in the shareholder structure, the real property remains the joint property of the partnership, both under civil law and with regard to beneficial ownership.

However, beyond pure causality, there is no link in terms of content between the acquisition of the limited partner’s shares and real estate transfer tax, as would be required with regard to income tax to qualify real estate transfer tax as acquisition costs relating to the limited partner’s shares. This is particularly clear from the fact that the notional legal transaction within the meaning of Sec. 1 (2a) of the German Real Estate Transfer Tax Act may result from an overall combination of individual acts. As a result, it is not possible to attribute the expenses incurred in respect of real estate transfer tax to specific partnership shares which have been acquired.

With this decision, the Ninth Senate of the German Federal Fiscal Court follows the line of the First Senate which, in its judgment dated 20 April 2011 (I R 2/10), likewise ruled in favour of an immediate deduction of real estate transfer tax as business expenses (Betriebskosten) in the case of consolidation of shares under Sec. 1 (3) No 1 of the of the German Real Estate Transfer Tax Act.