Update: New ECJ judgment (19.12.2018)
Current article: ECJ brings relief: German intragroup RETT exemption clause is no illegal state aid
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 advocate general gives hope with his opinion after which 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.
Reference for a preliminary ruling at the ECJ
The German Federal Fiscal Court (BFH) must decide a case in which the property owning entity was absorbed by way of an upstream-merger to its parent company. The fiscal administration negated the application of the intragroup RETT exemption clause since the parent entity did not hold the shares in the transferring company for at least five years after the conversion. As before the fiscal court the BFH deems the intragroup RETT exemption clause to be applicable. Notwithstanding that the court raised concerns as to whether the intragroup RETT exemption clause is compatible with EU’s state aid law. Thus, the BFH applied for a preliminary ruling at the European Court of Justice (ECJ). In the event the intragroup RETT exemption clause would be a state aid any RETT not charged based upon the clause must be levied retroactively since the clause has not been approved by the EU Commission in an advanced notification procedure and would therefore qualify as an illegal state aid (Art. 108 para. 3 TFEU).
Opinion of ECJ’s Advocate General: no state aid
In this year’s fall the advocate general at the ECJ issued his opinion in the legal case C-374/17 A-Brauerei. The advocate general recommends that 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.
According to the traditional method of analysis a national rule is selective only if its advantage is not open to all undertakings present on the national territory. This is from the advocate general’s fitting point of view not true in the case at hand since all group of companies – irrespective of their place of management or registered seat – can benefit from the rule.
According to the ‘reference framework’ method a national rule is selective if it deviates from the relevant reference framework, where it is not open to all undertakings in comparable situations, and where it is not justified by the nature or overall structure of the system at issue. In the advocate general’s opinion the German intragroup RETT exemption clause does not derogate from the reference framework which is in his opinion the taxation of the acquisition of control over a property located in German.
Since the EU Commission, on the contrary, sees the ‘reference framework’ only in Sec. 1 German RETT Act which defines the transfer transactions which give rise to the tax obligation for all persons who acquire real estate in Germany and thus qualifies the intragroup RETT exemption clause as derogation the advocate general alternatively checks the potential selectivity under the ‘reference framework’ method. Also under this method he sees no selective rule which must be considered as state aid. From the advocate general’s view entities within a group of companies and other entities are not in a comparable situation as the parent company in a group structure already economically owns the property transferred by the conversion whereas a conversion between third parties leads to real (indirect) transfer of control over the acquired property. Even if one would affirm a derogation this derogation could, from the advocate general’s perspective, 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.
ESCHE’s comment and outlook
ECJ’s advocate general’s opinion is much to be welcomed. The advocate general fittingly emphasizes that the ‘reference framework’ method could easily lead to the need of an examination of almost each (German) tax rule as regards the compliance with EU state aid law. The issued opinion gives a balanced view on the conformity of advantageous national tax law with state aid law. From this perspective it is hoped that the ECJ follows its advocate general’s recommendations, this also in view of the potential qualification of further advantageous tax rules as illegal state aid. Although the scope of the intragroup RETT exemption clause has, due to its many prerequisites, always been quite limited ECJ’s upcoming decision provides a chance to revive the long-awaited flexibility for conversions between group entities.
Authors: Daniel Fengler, Simon Pommer, LL.M.