Real estate transfer tax (Grunderwerbsteuer) in Germany was originally set at 3.50%. Since September 1, 2006, however, the country’s individual federal states have been able to set their own real estate transfer tax rates. For many states, this has become a lucrative source of income. And so it seems that these increases are set to continue. Berlin, for example, aims to raise its real estate transfer tax rate to 6.00% as of January 1, 2014. In fact, Saxony and Bavaria are the only states that have kept real estate transfer tax at 3.50%. However, it can only be a matter of time before these last two states also raise their rates.
Table showing current and planned real estate transfer tax rates:
If the individual federal states continue to increase tax rates, companies must take appropriate steps to minimize the impact on planned real estate transactions. A company planning to make a transaction subject to real estate transfer tax can reduce the tax burden by ensuring that the taxable transaction is realized in good time.
Real estate transfer tax is generally due when the purchase is realized. In most cases, this is upon execution of the notarized contract of purchase. The actual transfer of ownership, benefits and encumbrances, which usually takes place at a later date, as well as the date on which the purchase price is paid and the transfer is entered in the land register are therefore irrelevant. It is important to note, however, that real estate transfer tax is not generally triggered when a letter of intent or option rights are agreed or granted. The tax is only applicable when these options are exercised.
The following information is particularly relevant in relation to the most common conditions stipulated in contracts of purchase:
If a federal state is planning to increase real estate transfer tax, the date of the change and performance of the legal transaction are the most important factors. The regional tax offices of Rhineland and Münster issued guidelines on this on August 16, 2011. According to this information, the date on which the purchase contract is certified by a notary plays a defining role in the sale of real estate; in other words, the determining factor is whether the transaction is certified before or after the date the tax change enters into effect. This said, each case is individual and every company needs to exercise caution. If, for example, a contract contains a condition precedent or is subject to a specific approval, the real estate transfer tax is generally deferred until the condition has been met or the approval given. In the view of the financial authorities, the tax often only becomes applicable once the condition that enables the purchase transaction to be carried out has entered into effect.
On July 29, 2013, however, the Fiscal Court in Düsseldorf ruled that real estate transfer tax triggered at the time a condition was met was nonetheless to be paid at the rate applicable at the time the contract was concluded. In this particular case, a contract was concluded in 2004. Part of the purchase price, however, was dependent on approval to be granted by public authorities. This condition was not met until 2012. Although the real estate transfer tax rate had increased by this time, the Fiscal Court ruled that the tax should be paid at the rate applicable at the time the contract was certified by the notary in 2004.
Conditions subsequent are the only conditions that do not have a restrictive impact on the purchase transaction. In the case of a condition subsequent or the agreement of withdrawal rights, the real estate transfer tax becomes chargeable once the notarial purchase contract is concluded. Similarly, the tax debt is not deferred if a contract contains a postponement clause. In other words, real estate transfer tax also usually arises in this instance at the time the contract of purchase is certified by the notary.
In this regard, it should also be noted that if a completed purchase transaction is rescinded, the tax can be lowered on request, provided that the reduction takes place less than two years from the time at which the tax became applicable. This is also the case if the purchase price is reduced at a later date, for example, if conditions are not met. If conditions that reduce the purchase price enter into effect over an extended period, the purchaser should take steps to ensure that the real estate transfer tax is provisionally assessed in line with § 165 of the German General Tax Code (Abgabenordnung). Furthermore, the regulations governing retrospective tax reduction following a drop in the purchase price or the rescission of a purchase only apply if the purchase has been duly reported to the fiscal authorities. This important step is sometimes neglected, especially if a company “indirectly” purchases real estate following the acquisition of shares in companies that own real estate.
Summary:
When a company finds a property it wants to purchase, it should sign the notarized contract sooner rather than later. As a rule, the date of the notarized certification is the deciding factor when assessing the tax burden – and not the transfer of benefits and encumbrances and so it is irrelevant if this takes place at a later date. Parties can draft contractual conditions to protect themselves against any uncertainties they may still have about the purchase at this time. There is no way of avoiding real estate transfer tax, however, by drawing up contracts in good time, you can eliminate additional costs resulting from changes to the tax rate.
Contact:
Thomas Jäger, Partner, Tax Advisor
The initiation of criminal tax proceedings by German tax offices, mostly as a result of innocent mistakes, according to the motto “shoot first, ask questions later” is by now common practice, which some managing directors have already experienced painfully at first hand. The core question here is usually the demarcation between simple error correction on the one hand and (actually undesirable) punitive voluntary declaration on the other.
