Baden-Württemberg Tax Court: Change of Management Company of a Luxembourg FCP Does Not Trigger Real Estate Transfer Tax

Background

The case concerned a cross-border fund structure. A contractual investment fund under Luxembourg law (Fonds Commun de Placement, FCP) indirectly held all shares in a Luxembourg company, which in turn held an interest in a company owning real estate in Germany.

Under Luxembourg law, an FCP is a separate pool of assets without legal personality. The fund is managed by a management company acting in its own name but for the account of the fund and its investors. In the case at hand, this management company was replaced.

The tax office took the view that, as a result, at least 95 percent of the shares in a real estate-owning company had indirectly been transferred to the new management company and assessed real estate transfer tax under Section 1 para. 3 no. 4 of the former German RETT Act. Under the current rules, the relevant ownership threshold is at least 90 percent.

The claimant argued, however, that only fund-related management functions had been transferred. Under Luxembourg law, civil-law ownership of the fund assets remained with the investors.

Baden-Württemberg Tax Court Decision on Real Estate Transfer Tax

The Baden-Württemberg Tax Court agreed with the claimant and cancelled the real estate transfer tax assessment. In the Court’s view, Section 1 para. 3 no. 4 of the former German RETT Act requires shares in a real estate-owning company to be transferred, under civil law, to another legal owner. No such transfer of shares occurred in this case.

What was transferred was merely the role of the management company and, therefore, the authority to manage the fund assets. Under the relevant Luxembourg law, civil-law ownership of the indirectly held interests remained with the investors in the FCP.

According to the Court, the mere transfer of management, disposal or control powers is not enough to create a taxable share transfer. In this respect, the Tax Court considered the FCP to be more comparable to a German contractual investment fund structured as a separate pool of co-owned assets, rather than to a trust arrangement.

The Court also held that the general real estate transfer tax principles developed by the German Federal Fiscal Court for trust arrangements did not apply by analogy. Likewise, the registration of the management company in the Luxembourg company or commercial register “for and on behalf of” the FCP did not change the outcome. In the Court’s view, that registration had no constitutive legal effect for real estate transfer tax purposes and did not alter the civil-law allocation of the shareholdings.

It is particularly worth noting that the Court draws a clear line against an economically broadened reading of Section 1 para. 3 of the German RETT Act. Real estate transfer tax is, as a transaction tax, generally linked to civil-law legal acts. If the legislature wanted changes of this kind at management level to be taxable, an explicit statutory basis would be required.

According to the Court, the position would be different if the interests themselves were effectively transferred to another legal owner, for example to another Luxembourg FCP. The decision therefore does not give FCPs a blanket exemption; rather, it turns on the fact that a mere change of management company does not involve a transfer of shares.

The Court allowed an appeal on points of law. It is currently not known whether such an appeal has been filed.

Current Real Estate Transfer Tax Position in Germany

The decision is relevant beyond the specific facts of the case because it concerns the real estate transfer tax treatment of international fund and real estate structures.

Under German real estate transfer tax rules, not only direct transfers of real estate but also transfers of shares in real estate-owning companies can trigger RETT. In practice, share deals, fund restructurings and changes at management level therefore need to be reviewed carefully to determine whether shares are actually being transferred or whether only management rights are moving.

The Tax Court makes clear that changing the management company of a Luxembourg FCP is not a taxable event if the investors remain the civil-law owners of the fund assets and no shares in a real estate-owning company are transferred to the new management company. For taxpayers, this may be an important argument in ongoing or planned fund restructurings.

Our Real Estate Transfer Tax Recommendation

Against the background of this decision, comparable fund and real estate structures should be reviewed for German RETT purposes at an early stage. The focus should not be solely on economic control over the fund assets, but in particular on the civil-law ownership of the shareholdings under the relevant foreign law.

Key points to review include:

• Who is the civil-law owner of the relevant shareholdings under the applicable foreign law.
• The distinction between a RETT-relevant transfer of shares and a mere change in management or disposal powers.
• Taking into account the admitted appeal on points of law and monitoring any further case law of the German Federal Fiscal Court.
• Documenting the RETT analysis in transaction documents, tax due diligence reports and internal decision papers.

We would be pleased to support you in analysing your specific structure and assessing whether, and to what extent, the current decision is relevant to your case. We can also advise whether suspending proceedings or taking further steps may be appropriate and feasible.