In summer 2017 the German Federal Fiscal Court raised concerns as to whether the German intragroup RETT exemption clause is an illegal state aid. The rule exempts transfer or real property between affiliated companies from German RETT. If the clause would be a state aid millions of German RETT must be levied retroactively. Now the ECJ’s followed its advocate general’s opinion and made clear that the clause is no illegal state aid.
As a general rule the transfer of more than 95% of the shares in a company triggers German RETT. Under the intragroup RETT exemption clause (Sec. 6a German RETT Act) certain conversions between a parent company and its subsidiaries incur no RETT. One of the major prerequisite is that the absorbing company held at least 95% of the transferring company’s shares five years before the conversion and – in general - holds these shares five years afterwards.
In 2017, a reference of the German Federal Fiscal Court (BFH) for a preliminary ruling at the ECJ raised concerns as to whether the intragroup RETT exemption clause is compatible with EU’s state aid law.
Opinion of ECJ’s Advocate General: no state aid
In this year’s fall the advocate general at the ECJ issued his opinion according to which the intragroup RETT exemption clause should not be qualified as state aid. From the advocate general’s point of view there is no unwanted selectivity which would be required for a state aid. This opinion is based upon the traditional method of analysis as well as on the ‘reference framework’ method whereby the advocate general expressively prefers the traditional method of analysis. The advocate general identified no unlawful selectivity of the intragroup RETT exemption and stated that such would at least be justified.by the concern clause’s objective taxing the financial capacity of the purchaser or of the vendor and by the retention period which avoids abusive short-term acquisition of shares in order to carry out transformations not subject to the tax on the acquisition of land.
ECJ’s Decision in the Case A-Brauerei (C -374/17)
With decision dated 19 December 2018 the ECJ ruled that the German intragroup RETT exemption clause is no illegal state aid. In essence, the ECJ follows its advocate general’s opinion but applies the ‘reference framework’ method instead of the traditional method of analysis which was favored by the advocate general for the examination of tax rules under state aid law.
According to the court’s decision the German intragroup RETT exemption clause deviates from the reference framework which the ECJ sees in Sec. 1 para 1 no. 3 and Sec 1 para 2a and para 3 German RETT Act. The deviation is seen in the application of the German intragroup RETT exemption clause applies only for restructuring procedures carried out between companies linked by a shareholding of at least 95% during a minimum, uninterrupted period of five years before and five years after that procedure while other companies with lower shareholding or shorter periods of shareholding do not benefit from the tax exemption. However, the court qualifies the deviation as justified since it seeks to avoid double taxation and stems from the nature and general scheme of the system of which it forms part. Consequently, the German intragroup RETT exemption clause cannot be seen as illegal state aid.
ECJ’s decision is reasonable and provides relief for intracompany restructuring procedures. Although the ECJ applied the ‘reference framework’ method instead of the traditional method the court gives a balanced view on the conformity of the German intragroup RETT exemption clause with EU state aid law. The scope of the intragroup RETT exemption clause will, due to its many prerequisites, still be quite limited. However, its conformity with EU state aid law is much welcomed since affected companies do now have more legal certainty as regards the application of the tax exemption. It is hoped that the BFH adjudicates the pending national lawsuit quickly.
Unfortunately, the ECJ did not take the chance adopting its advocate general’s approach to end the discussion on the application of state aid law to beneficial tax rules. Therefore, it must be expected that the discussion will continue for comparable tax exemptions or reliefs. However, the present decision provides defense arguments against any alleged non-conformity of such tax rules with EU state law since the purpose of a rule to avoid non- or double taxation is qualified as justification for different treatment of comparable tax payers.
Authors: Daniel Fengler, Simon Pommer, LL.M.