Federal Fiscal Court ruling: Excessive purchase price - real estate transfer tax alongside gift tax and hidden profit distribution

Conflicting tax assessments under section 174 of the Fiscal Code in the case of an excessive purchase price

Section 174 of the Fiscal Code occupies a special position among the amendment provisions of sections 172 and following of the Fiscal Code. It is the only amendment provision of sections 172 and following of the Fiscal Code that has never been altered since its introduction on 1 January 1977 (see already its application to the year in dispute 1981, Federal Fiscal Court judgement of 11 Jul 1991, file ref. IV R 52/90, Federal Tax Gazette [Bundessteuerblatt–BStBl.] II 1992, p. 126).

Its five subsections govern different constellations of conflicting tax assessments in the area of tension between finality [Bestandskraft] and substantive correctness. Under section 174(1) sentence 1 of the Fiscal Code, an incorrect tax assessment notice is to be revoked or amended upon application where a particular set of facts has been taken into account in several tax assessment notices to the detriment of one or more taxpayers, although it should have been taken into account only once. If the assessment period [Festsetzungsfrist] has already expired, the application may still be filed until the end of one year after the last of the notices concerned has become incontestable (section 174(1) sentence 2 of the Fiscal Code).

The prerequisite is a conflict: under substantive law, the notices must necessarily – “by logical necessity” [denknotwendig] – be incompatible, because only one of the legal consequences can apply (Federal Fiscal Court judgement of 20 Mar 2019, file ref. II R 61/15, Federal Tax Gazette II 2020, p. 463, para. 13; Federal Fiscal Court judgement of 18 Jul 2023, file ref. IX R 17/22, Federal Tax Gazette II 2024, p. 90, para. 37).

Section 3 no. 2 sentence 1 of the Real Estate Transfer Tax Act is decisive for the relationship between real estate transfer tax and gift tax. Under this provision, gifts of real property inter vivos within the meaning of the Inheritance and Gift Tax Act [Erbschaftsteuer- und Schenkungsteuergesetz–ErbStG] are exempt from real estate transfer tax. In the case of a mixed gift [gemischte Schenkung] – where the property is transferred significantly below its value – the gratuitous portion is therefore subject to gift tax alone. Otherwise, real estate transfer tax is assessed on the value of the consideration (section 8(1) of the Real Estate Transfer Tax Act), which, in the case of a purchase, is the purchase price including other services assumed by the purchaser and the benefits of use reserved to the seller (section 9(1) no. 1 of the Real Estate Transfer Tax Act).

Where a limited liability company pays a person close to its shareholder an excessive remuneration, this does not, according to case law, constitute a gratuitous transfer [freigebige Zuwendung] by the company. However, a gift by the shareholder to the related person may come into consideration (section 7(1) no. 1 of the Inheritance and Gift Tax Act), because the shareholder disposes of his or her future profit entitlement by way of the hidden profit distribution (Federal Fiscal Court judgement of 13 Sep 2017, file ref. II R 54/15, Federal Tax Gazette II 2018, p. 292, para. 35).

In the case in dispute, a limited liability company purchased property developed with a commercial building in 2011 for EUR 1.1 million. The seller was the partner (B) of the sole shareholder and managing director (A). The tax office assessed real estate transfer tax of EUR 38,500 on the full purchase price; the assessment became final. In 2022, the responsible tax office assessed gift tax of EUR 175,590 against B. It assumed a gratuitous transfer from A to B, because the purchase price was significantly higher than the separately determined real property value [Grundbesitzwert] of EUR 480,000.

The company thereupon applied for the real estate transfer tax to be reduced under section 174(1) sentence 1 of the Fiscal Code. The Fiscal Court [Finanzgericht–FG] of Mecklenburg-Western Pomerania ordered the tax office to assess the tax at EUR 16,800 (Fiscal Court of Mecklenburg-Western Pomerania judgement of 19 Sep 2023, file ref. 1 K 233/22). In its view, the excess price had been taken into account twice: it could be either consideration for the property or a gratuitous transfer, but not both. The second chamber of the Federal Fiscal Court set aside the judgement and dismissed the action.

Real estate transfer tax on the full purchase price: no conflict

The Federal Fiscal Court does affirm a “uniform set of circumstances” [einheitlicher Lebenssachverhalt] for the purposes of section 174(1) of the Fiscal Code: the sale at EUR 1.1 million with a real property value of EUR 480,000 gave rise to both assessments (para. 14; cf. Federal Fiscal Court judgement of 19 Aug 2015, file ref. X R 50/13, Federal Tax Gazette II 2017, p. 15, paras. 20 and 21). The notices do not, however, conflict with one another. The Federal Fiscal Court bases this on three core propositions:

• Mutual exclusivity only for gifts of real property: The conflict relationship between gift tax and real estate transfer tax generally assumed in the literature extends only as far as section 3 no. 2 sentence 1 of the Real Estate Transfer Tax Act. The relevant case law concerns only acquisitions for a consideration that is not insignificantly below the true value of the property (Federal Fiscal Court judgement of 20 Apr 1977, file ref. II R 48/76, Federal Tax Gazette II 1977, p. 676; Federal Constitutional Court [Bundesverfassungsgericht–BVerfG] decision of 15 May 1984, file ref. 1 BvR 464/81 and others, Federal Tax Gazette II 1984, p. 608). Where the consideration exceeds the value, there is no gift of real property.
• Transfer of money, not of the property: The subject matter of the gift was a transfer from A to B on the basis of a hidden profit distribution. Person “A” disposed of her future profit entitlement under section 29 of the Limited Liability Companies Act [GmbH-Gesetz–GmbHG] or made a withdrawal; the reduction in her assets corresponded to the increase in B’s assets. Section 3 no. 2 sentence 1 of the Real Estate Transfer Tax Act does not cover this constellation. The order for reference [Vorlagebeschluss] of 2 Mar 2011, file ref. II R 64/08 (para. 23) likewise concerns only mixed gratuitous transfers of real property, not of money.
• The consideration is the agreed purchase price: What is decisive is what has to be given for the acquisition, not what the purchaser receives. The fair market value of the property, the ratio of value between performance and consideration, and the parties’ motives are in principle irrelevant – even if the consideration exceeds the value (Federal Fiscal Court judgement of 2 Mar 2011, file ref. II R 23/10, Federal Tax Gazette II 2011, p. 932, paras. 18 and 19). This is supported by the nature of the tax as a tax on legal transactions [Rechtsverkehrsteuer] and by practicability. The property was to pass only against payment of the full EUR 1.1 million; EUR 480,000 would not have sufficed.

Both notices are thus compatible with one another under substantive law: the real estate transfer tax assessment is not incorrect (para. 24). The Fiscal Court’s “either-or” overlooks the fact that the two taxes are linked to different legal relationships: for real estate transfer tax purposes, the company pays the full price to B as consideration. For gift tax purposes, the excess price is a transfer from A to B that is processed via the company. Even if the excess price were attributed economically to the shareholder, it would remain consideration: payments by a third party to the seller in return for the seller leaving the property to the purchaser are also part of it (section 9(2) no. 4 of the Real Estate Transfer Tax Act).

The flip side is an asymmetry: in the case of a mixed gift of real property below value, the gratuitous portion remains exempt from real estate transfer tax, whereas in the case of an acquisition above value the excess price is subject to both taxes. In addition, real estate transfer tax does not follow the income tax assessment that allocates the excess price, as a hidden profit distribution, to the shareholder relationship (section 8(3) sentence 2 of the Corporate Income Tax Act [Körperschaftsteuergesetz–KStG]). Economically, the same excess amount may thus be burdened with real estate transfer tax, gift tax and income taxes. The Federal Fiscal Court does not permit any compensation via section 174 of the Fiscal Code.

Section 174 of the Fiscal Code: no Swiss Army knife against finality

Section 174(4) of the Fiscal Code operates in the opposite direction. Where a notice based on the erroneous assessment of a particular set of facts is amended in the taxpayer’s favour following an appeal or application by the taxpayer, the tax office may subsequently draw the correct tax consequences from this – even after the assessment period has expired, provided this is done within one year of the amendment (section 174(4) sentences 1 and 3 of the Fiscal Code). Whether the error was one of fact or of law is irrelevant (Federal Fiscal Court judgement of 21 Sep 2017, file ref. VIII R 59/14, Federal Tax Gazette II 2018, p. 163, para. 26). The income tax principle of periodic assessment [Abschnittsprinzip] (section 2(7) sentences 1 and 2 of the Income Tax Act [Einkommensteuergesetz–EStG]; section 7(3) of the Corporate Income Tax Act) does not limit the particular set of facts to a single assessment period (Federal Fiscal Court judgement of 14 Nov 2012, file ref. I R 53/11, para. 15). Consequential amendments are also possible across different types of tax, for instance to the corporate income tax assessment following the correction of an erroneously assumed VAT liability (Federal Fiscal Court judgement of 17 Mar 2022, file ref. XI R 5/19, Federal Tax Gazette II 2022, p. 607).

By contrast, section 174(4) of the Fiscal Code does not operate in the taxpayer’s favour. A favourable amendment obtained by means of an appeal cannot be transferred to other final assessments, for instance in order to circumvent the narrow requirements of section 35b of the Trade Tax Act [Gewerbesteuergesetz–GewStG] (Federal Fiscal Court judgement of 10 Mar 1999, file ref. XI R 28/98, Federal Tax Gazette II 1999, p. 475). Nor could a final income tax assessment including commercial profit be amended via section 174(4) of the Fiscal Code after the VAT had been revoked for lack of entrepreneurial status in respect of eBay sales (Saarland Fiscal Court judgement of 26 Nov 2025, file ref. 1 K 1174/23). The judgement II R 11/24 fits into this picture: under section 174(1) of the Fiscal Code, too, finality yields only where the assessments are mutually exclusive by logical necessity.

Vis-à-vis third parties, section 174(4) of the Fiscal Code applies only if they were involved in the proceedings that led to the amendment. Their joinder in the administrative proceedings [Hinzuziehung] or in the court proceedings [Beiladung] is permissible (section 174(5) of the Fiscal Code). In multi-party constellations such as the case in dispute – real estate transfer tax for the company, gift tax for B, and possibly income taxes for the company and for A – timely involvement is therefore crucial (cf. Münster Fiscal Court judgement of 1 Dec 2025, file ref. 14 K 2107/22 E, para. 30). An overview of the case law on section 174(4) and (5) of the Fiscal Code is provided by the Circular of the Regional Finance Office [Oberfinanzdirektion–OFD] of Baden-Württemberg of 1 Jul 2025.

Excessive purchase price: practical consequences

For property transactions between a corporation and its shareholders or persons close to them, an inappropriate purchase price entails a considerable risk of multiple taxation: a hidden profit distribution at the level of the company and investment income for the shareholder (section 8(3) sentence 2 of the Corporate Income Tax Act; section 20(1) no. 1 sentence 2 of the Income Tax Act), gift tax for the related person and real estate transfer tax on the full purchase price. The close relationship may also be established on a purely factual basis, as with a cohabiting partner. A documented arm’s length comparison, ideally a market value appraisal, should therefore already be available before the contract is concluded.

Once the excessive price has been paid, the options for correction are limited. According to the judgement, section 174(1) sentence 1 of the Fiscal Code does not help. Real estate transfer tax can only be reduced if the consideration is reduced, in particular within two years of the tax arising (section 16(3) no. 1 of the Real Estate Transfer Tax Act). The hidden profit distribution is not eliminated retroactively by a subsequent repayment (cf. Federal Fiscal Court judgement of 21 Oct 2025, file ref. VIII R 19/23, Federal Tax Gazette II 2026, p. 421).

In addition, gift tax has a long tail: the assessment period does not begin before the end of the year in which the tax authority obtains knowledge of the completion of the gift (section 170(5) no. 2 of the Fiscal Code). In the case in dispute, the relevant gift tax assessment dated from 2022, the real estate transfer tax assessment from 2011. Lines of defence therefore lie primarily in the gift tax proceedings: in the valuation from which the inappropriate excess price results, and in the subjective element of the gratuitous transfer.

Nothing changes for mixed gifts of real property: where real estate transfer tax and gift tax are assessed on the same gratuitous portion, a correction under section 174(1) sentence 1 of the Fiscal Code remains possible. Moreover, the provision operates in both directions: anyone who has an assessment amended in their favour on the basis of a particular assessment of the facts – for instance with the argument that part of the purchase price is not consideration but a hidden profit distribution – must accept the correct consequences in other types of tax and assessment periods (section 174(4) of the Fiscal Code). Procedural strategies should therefore be coordinated across all types of tax concerned, and affected third parties should be involved at an early stage.