Portuguese real estate transfer tax on restructurings violates EU law – signal effect for Germany

Facts: Establishment of a holding company in return for a contribution of interests in real estate companies

The judgment was based on a group restructuring carried out in 2019. Nova Iberomoldes was incorporated as a Portuguese company limited by shares. Its entire share capital was raised by contributions in kind made by the sole shareholder. The contributions consisted exclusively of interests in other companies, some of which held real estate located in Portugal.

The Portuguese tax administration treated the transaction as subject to the municipal real estate transfer tax (Imposto Municipal sobre a Transmissão Onerosa de Imóveis; IMT). Under the IMT legislation, not only direct transfers of real estate are taxable, but also the acquisition of shares in certain companies holding real estate, if this causes a shareholder to reach at least a 75% shareholding threshold. As the tax administration considered these requirements to be fulfilled, it imposed IMT by way of an additional assessment.

The Portuguese tax arbitration court referred to the CJEU the question whether the levying of real estate transfer tax in such a constellation infringes the Capital Duty Directive.

Capital Duty Directive and classification as a restructuring

The CJEU explains that indirect taxes on the raising of capital and taxes on restructurings are to be largely abolished by the Capital Duty Directive. The aim is to avoid discrimination, double taxation, and obstacles to the free movement of capital. The Directive fully harmonizes this area and allows taxation only in exceptional cases.

Article 3 lit. a also covers the incorporation of a company as a capital contribution. Article 4 para. 1 lists certain restructurings in addition, including, in lit. b, the acquisition of a majority of the voting rights in another company limited by shares in return for the granting of shares in the acquiring company at least in part.

Accordingly, the incorporation of Nova Iberomoldes in principle falls under Article 3 lit. a, but at the same time fulfils Article 4 para 1 lit. b: The newly established company acquires majority shareholdings in other companies limited by shares, while the contributing sole shareholder receives shares in the acquiring company in return. The CJEU therefore classifies the transaction as a restructuring and not as a mere capital contribution.

Article 5 para. 1 lit. a and lit. e prohibit Member States from levying indirect taxes on capital contributions and restructurings. A transaction such as the case at issue is therefore in principle exempt from tax, unless an exception under Article 6 applies.

IMT as a prohibited indirect tax on a restructuring

According to the ECJ, the IMT qualifies as an indirect tax on a restructuring, on which Member States may not levy any indirect taxes pursuant to Article 5 para. 1 lit. e. The fact that the tax base is determined by reference to a reference value of the real estate concerned does not change this. The triggering event is not an isolated transfer of real estate, but the corporate contribution in kind of shares.

The ECJ emphasises that Article 6, as an exception to the prohibition of taxation under Article 5, must be interpreted strictly. Thus, the exception in Article 6 para. 1 lit. a does not apply, as it was not an isolated securities trade that was taxed, but the establishment of a holding company with contributions in kind. Nor do the exceptions in Article 6 para. 1 lit. b and lit. c, for transfer taxes, apply. According to the relevant case law, transfer taxes require a transfer of ownership in real estate, which is not present in the case of the contribution of shares in a company holding real estate. In the view of the CJEU, the strict interpretation of Article 6 also precludes the economic approach, based on a fictitious transfer of real estate, put forward by the German government.

The CJEU therefore concludes that the Capital Duty Directive precludes a national provision under which a tax such as the Portuguese IMT is levied on a transaction that qualifies as a restructuring within the meaning of Article 4 para. 1 lit. b. For such transactions, Member States may not levy any indirect taxes pursuant to Article 5 para. 1 lit. e.

Relevance to German real estate transfer tax

The decision is of particular interest for German real estate transfer tax law because the Portuguese IMT regime shows clear parallels to the German share deal provisions. Pursuant to § 1 Abs. 2a, 2b, 3, and 3a GrEStG, transactions are also subject to real estate transfer tax in which no real property is directly transferred, but rather shares in a company owning real property are transferred or consolidated to an extent that confers significant influence (90%). In practical terms, economic changes of ownership in real estate are thus captured via share transfers.

Where shares in companies holding real estate are transferred in the context of restructurings (including, inter alia, mergers, spin‑offs, and contributions), there is the possibility of a tax exemption under § 6a GrEStG. However, this tax exemption is subject to strict conditions. In addition to the existence of a privileged measure, shareholding thresholds (95%) as well as pre‑ and post‑holding periods (five years each) must be fulfilled. In practice, the tax exemption therefore often does not apply (for example, in the case of the contribution of shares in a company holding real estate into a newly established holding company), because the pre‑holding period is not fulfilled.

In its judgment of 25 September 2024 (II R 36/21), the German Federal Fiscal Court (BFH) had still taken the view that § 1 para. 3 GrEStG does not infringe the Capital Duty Directive and had not considered a reference to the CJEU to be necessary. The BFH classified the real estate transfer tax triggered by the transfer of shares as a permissible transfer tax within the meaning of Art. 6 para. 1 lit. b.

In light of the ‘Nova Iberomoldes’ judgment, this view is likely to be obsolete. On the one hand, the CJEU interprets the scope of application of the Directive broadly by classifying the establishment of a holding company with a contribution of shares in real estate companies as a restructuring within the meaning of Art. 4 para. 1 lit. b and subjecting it to the comprehensive prohibition on levying taxes in Art. 5 para. 1 lit. e. At the same time, it narrows the scope of the exceptions to the prohibitions on levying taxes in Art. 6 para. 1 lit. b by emphasizing that a transfer tax presupposes an actual transfer of ownership in real property and cannot be extended to mere share transfers by way of legal fictions or an economic approach. These principles should also be applicable to restructuring transactions that trigger taxation under § 1 para. 2a, 2b, 3, and 3a GrEStG.

At present, another case on the compatibility of the real estate transfer tax share deal provisions with the Capital Duty Directive is pending before the BFH under case number II R/23. It remains to be seen whether the BFH will revise its previous view or refer the question of the compatibility of the German real estate transfer tax rules with the Capital Duty Directive to the CJEU for a preliminary ruling. Pending cases should be kept open with reference to the judgment in ‘Nova Iberomoldes’ as well as the pending BFH proceedings. For assessed real estate transfer tax, it should be examined whether a legal remedy is available.