German companies could be hit with an unexpected tax bill if the European Court of Justice (ECJ) rules that a commonly used clause in the country’s Real Estate Transfer Tax (RETT) Act constitutes state aid.
Following a tax dispute, the German Federal Fiscal Court last week referred a list of questions to the ECJ over § 6a of the Act, which exempts acquisitions within a group of companies from RETT under specific circumstances, when they are part of a group restructuring.
"The application of § 6a German RETT Act is quite common in regard to group reorganisations," said Silvan Hussein of Bödecker Ernst & Partner.
"Such reorganisations regularly can be realised without triggering taxes on profit according to German tax law," he continued. "In case that property holding companies are involved, the provision is regularly utilised by corporate groups - provided that the requirements are met - in order to allow tax neutrality for the purpose of RETT as well."
If the ECJ decides that § 6a could be considered state aid, the Act will be suspended, and then investigated by the European Commission to see whether it is compatible with the European Single Market.
The worst-case scenario for companies would be if the Commission decides that the provisions constitute state aid, which would likely lead to it ordering Germany to 'claw back’ the tax from companies.
While this process would likely take at least two years, and both Hussein and the Federal Fiscal Court feel it is unlikely that § 6a constitutes state aid, the outcome is not certain and companies should track the issue closely.
"The prohibition on state aid according to Art. 107 para. 2 TFEU effects an override of the generally applicable protection for reliance on existing law," said Hussein. "As such, the member states are generally obliged to reclaim unapproved aids qualified as incompatible with the European Single Market, even in case that according to their national law a final assessment and administrative finality exists."
The use of state aid powers in tax cases has been dramatically increased in the last few years – in particular under the tenure of European Competition Commissioner Margrethe Vestager – with some advisers accusing the Commission of using the mechanism as a "blunt instrument" with which to force companies to pay more tax.
Facts of the dispute
In the case concerned, the parent company wholly owned a landowning subsidiary, and had done for more than five years, satisfying the final condition of § 6a. The subsidiary was merged into the parent in 2012, which the German tax authorities deemed to be a taxable acquisition outside the scope of § 6a of the RETT Act.
The as-yet unnamed company appealed, the first-instance court in Nuremburg agreed with it and, in accordance with German law, the Federal Fiscal Court is also inclined to do so, disregarding several of the narrow interpretations of the tax authorities. One such argument was the fact that the companies merged in 2012, meaning that the parent no longer held shares in the subsidiary.
Is it possible to predict the ECJ’s decision?
The Federal Fiscal Court doubts whether the § 6a tax concession is unlawful aid under Article 107 (1) of the Treaty on the Functioning of the European Union (TFEU), which prohibits selective aid for certain undertakings or areas of production.
However, national courts have an obligation to address the ECJ when state aid questions regarding legislation which has not been given advance approval by the Commission, according to article 108, paragraph 3 of the TFEU.
"The German Federal Fiscal Court sees remarkable aspects substantiating the view to not consider § 6a as incompatible state aid," said Hussein. "The tax relief appears to be justifiable. Nevertheless, reasonable doubts exist in particular regarding the fact whether the tax relief might indeed grant a tax benefit in the favour of certain companies or industrial sectors only and as such qualifies as selective advantage. However, the tax relief might be qualified as justifiable adjustment to the general Rule as well."
To be considered state aid, the Commission’s website states that a measure needs to have the following features:
- There has been an intervention by the state or through state resources which can take a variety of forms (e.g. grants, interest and tax reliefs, guarantees, government holdings of all or part of a company, or providing goods and services on preferential terms, etc.);
- The intervention gives the recipient an advantage on a selective basis, for example to specific companies or industry sectors, or to companies located in specific regions;
- Competition has been or may be distorted; and
- The intervention is likely to affect trade between member states.
"If the tax relief according to § 6a RETT Act is appropriate to impact the trade between the member states and distorts the competition, such characteristics would be inherent to almost any kind of tax benefits granted by law," said Hussein.
"As such, a potential qualification by the ECJ as state aid would have a major impact on the challenging of further tax benefits as well. On the basis of the referral decision it is more likely than not that the ECJ will come to the conclusion that § 6a RETT Act should not qualify as state aid," he concluded.
The above article was first published on www.internationaltaxreview.com on 28 June 2017 and has been republished with the approval of the Publisher. Further copying and distribution are prohibited without permission of the publisher.