The German tax authorities have adopted the controversial "signing closing theory" for share deals involving at least 90% of the shares in an entity holding real estate located in Germany. Pursuant to this theory, the conclusion of the agreement (signing) and the transfer of the shares (closing) constitute two separate events which are both subject to German real estate transfer tax (RETT). In the view of the tax authorities, signing shall qualify as a taxable event under the unification rule pursuant to § 1(3) GrEStG and closing under the partnership rule or cooperation rule pursuant to § 1(2a) or (2b) GrEStG, see this earlier post. As a general rule, however, the RETT assessment under the unification rule shall be revoked once closing occurs and the conditions for the application of either the partnership rule or the corporation rule are met.

§ 16(4a) of the German Real Estate Transfer Tax Act (Grunderwerbsteuergesetz or GrEStG)

It was unclear which procedural provisions should apply to the cancellation of the RETT assessment under the unification rule. Hence, in the Annual Tax Act 2022, the German legislator introduced the new correction provision of § 16(4a) GrEStG intended to avoid potential double taxation, but instead of decreasing the double taxation risk, this new provision increases it.

2x RETT

Given that a correction according to § 16(4a) GrEStG is available only if "timely and in all respects complete notifications" are made in respect of signing as well as closing, an inherent double taxation risk is now present by operation of law. Such a precondition has a detrimental impact on transactions in which signing, closing or both are not reported to the tax authorities at all, or are notified erroneously, e.g., are not filed with the competent tax office within the relevant deadline (two weeks or one month, depending on the residence of the relevant taxpayer), or do not comply with the extensive filing requirements. In such cases, RETT may be assessed twice and the assessment under the unification rule may not be revoked. Further, the tax authorities do not automatically correct any RETT assessment under the unification rule pursuant to § 16(4a) GrEStG, but such amendment requires an application from the taxpayer.

Outlook

The practical impact of the newly introduced § 16(4a) GrEStG largely hinges on the question whether the tax authorities refrain from assessing RETT in respect of signing pursuant to the unification rule if a taxable event under the partnership rule or the corporation rule (i.e., closing) occurs within a period of one year as provided for under the respective decrees, see this earlier post. Notwithstanding the future approach of the tax authorities, in case of share deals comprising entities holding German situs real estate, the affected taxpayers have to carefully monitor the scope of notifications required and comply with the relevant requirements to mitigate the risk of a potential double taxation.