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25 March 2019 / article

Legal ownership of shares not subject to transfer tax

A manager of a German (real estate) fund with the legal form Sondervermögen, acquired for the account of the fund all shares in so-called real estate legal entities (onroerendezaakrechtspersonen) (OZRs).

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The present case concerned the acquisition of shares in private limited companies with investment properties. Under German law, the Sondervermögen is regarded as a separate capital without legal personality that invests for the account and risk of the participants. The participants are each entitled to less than 1/3 of the proceeds and value of the shares in the OZRs.

Question of law and importance

The interested party acquired the legal title of the shares in the OZRs. At dispute is whether interest has been acquired in the OZRs by virtue of the retention/holding of the legal title, which is required for a taxable event for the levy of transfer tax.

Assessment by the District Court

The Zeeland - West Brabant District Court ruled that the full interest in the shares in the OZRs was acquired by (the participants in) the Sondervermögen. Therefore, in the District Court's opinion, the interest in the OZRs can never belong or have belonged to the assets of the manager. It follows from this, according to the Court, that the manager is not liable for transfer tax on the acquisition of the shares in the OZRs.

Practical implications

The manager acquired the legal title of the shares in the OZRs for the account of the participants. For many unincorporated real estate funds (such as mutual funds (FGRs) and limited partnerships (CVs) in the Netherlands), the legal title of the real estate or the shares in an OZR (mandatory or not) is held via a custody entity. If the investors in the German real estate fund in question had been able to acquire full ownership of the shares directly, the acquisition of those shares would not have been subject to transfer tax at all, since none of the investors would have acquired more than one-third of the shares.

For the real estate fund practice with a separate custody entity, the final outcome of these proceedings is of great importance. If this court ruling is confirmed in the further course of the proceedings, this could mean that this type of real estate fund could acquire OZRs without the levy of transfer tax. This applies, of course, provided that no investor acquires an interest larger than one-third of the shares.