A recent preliminary ruling of the Court of Justice of the European Union (CJEU) could have significant implications for businesses holding German real estate through corporate structures. While the case itself concerned Portuguese tax law, its reasoning raises concerns about the compatibility of the German real estate transfer tax regime (RETT) with EU law.

What was the case about?

The case, known as Nova Iberomoldes, involved a relatively common type of corporate restructuring. A company that owned all the shares in a Portuguese real estate holding company contributed those shares to a newly formed entity in exchange for shares in that new entity. Under Portuguese law, when 75% or more of the shares in a real estate holding company change hands, this is treated as if the underlying property itself had been transferred, triggering real estate transfer tax.

What did the CJEU decide?

The CJEU decided that the share-for-share exchange constituted both a contribution of capital and a restructuring operation under the EU Capital Duties Directive (Capital Directive). Such transactions must be exempt from indirect taxation under the Capital Directive. The CJEU considered the Portuguese real estate transfer tax to be an indirect tax since it was triggered by the transfer of the shares, even though it was calculated by reference to the value of the underlying property. 

The CJEU also rejected an argument that the Portuguese tax was permitted under the exception for transfer duties on transfers of immovable property. The CJEU held that this exception requires an actual transfer of ownership of the real estate. Here, the share transfer formed part of the restructuring operation, and legal ownership of the real estate remained with the real estate holding company. Contrary to the position of the Portuguese and German governments, the CJEU concluded that a mere change at the shareholders' level without a transfer of ownership in the real estate was insufficient. It was therefore irrelevant that the Portuguese tax law deemed an acquisition of real estate to have taken place.

What are the implications for German RETT law?

The CJEU's decision may have material implications for German RETT law, which can similarly be triggered by certain corporate restructurings even where the property itself does not change hands, for example, where 90% or more of the shares in a property-holding company are acquired by new shareholders. Although German RETT law contains an exemption for certain intra-group reorganisations, the conditions are often difficult to satisfy in practice.

In a case in 2024, the German Federal Fiscal Court (BFH) held that the Capital Directive does not preclude German RETT in such circumstances, relying in particular on the exception for certain real estate transfer duties. The BFH therefore refrained from referring the question to the CJEU for a preliminary ruling. A constitutional challenge against the decision by the BFH to refrain from a referral to the CJEU was recently not accepted for adjudication by the Federal Constitutional Court. However, the Federal Constitutional Court only had to decide whether the BFH had arbitrarily refrained from making a referral to the CJEU. In this regard, the Federal Constitutional Court noted that whether the CJEU's ruling in Nova Iberomoldes would require a different assessment cannot retroactively establish that the BFH's decision was arbitrary. 

What should businesses affected by German RETT do now?

The question of whether German RETT law is compatible with the Capital Directive remains unresolved. The BFH may now take the opportunity to revisit aspects of its approach in light of the CJEU's reasoning and allow the CJEU to resolve the question by referring a pending case to the CJEU for a preliminary ruling on the comparable RETT provisions in Germany. A potential legislative response to the CJEU's ruling in Nova Iberomoldes is unlikely as long as the CJEU has not had the opportunity to address the compatibility of German RETT law with the Capital Directive.

In the meantime, taxpayers should assess whether past transactions that may fall within the scope of the Capital Directive have triggered German RETT. Where it is procedurally still possible, taxpayers should consider appealing against such RETT assessments.