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Cross-border sale of real estate companies


Many double tax treaties (DTTs) concluded by Germany contain a provision assigning Germany the taxation right on profits from the sale of foreign company shares, whose value is (in)directly derived from more than 50 percent on real estate located in Germany. However, in the absence of a comprehensive national taxable event, Germany could only exercise this taxation right if the company concerned had its statutory seat or effective place of management in Germany. In particular, Germany could not, for example, impose taxes on transactions involving the sale of shares in a Luxembourg company owning real estate in Germany, either directly or through a German real estate company, even though the taxation right was allocated to Germany under the applicable DTT. The legislator addressed this regulatory gap by introducing a new provision (Sec. 49 para. 1 no. 2 lit. e) cc) in the German Income Tax Act (ITA).

Legal situation since 1 January 2019

Since 1 January 2019, domestic income subject to a limited tax liability is assumed under the new provision, if the following criteria are met: 


  • The taxpayer (in)directly held at least 1 percent of the shares in a company with its statutory seat and effective place of management abroad within the last five years prior to the sale of its shareholding.
  • At any time during the last 365 days prior to the sale, more than 50 percent of the value of the shares in the foreign company was (in)directly derived from real estate located in Germany and the seller was (at least) the beneficial owner of the shares at that time. However, the taxpayer is not required to have held at least 1 percent of the shares in the company at the relevant point of time. When determining the 50 percent threshold, it is irrelevant whether the domestic real estate is owned by the company itself or by its (sub-)subsidiaries.

In order to examine whether the criteria are met, the value of the domestic real estate needs to be assessed in relation to the value of the company’s total assets. In this regard, the 50 percent threshold is to be determined based on the book values of the assets at the time of disposal. For this purpose, the book values of the assets recognized in the latest balance sheet have to be carried forward to the date of disposal. Liabilities (e.g. bank debts) are not considered when determining the relevant threshold. In case the company only indirectly owns domestic real estate through one of its subsidiaries, the 50 percent threshold must be determined on a consolidated basis.

Practical information

According to most DTTs signed by Germany, the 50 percent threshold only needs to be met at the time of disposal (and not at any time during the last 365 days prior to the sale like in case of Sec. 49 para. 1 no. 2 lit. e) cc) ITA). Therefore, companies may change their asset structure shortly before the sale of shares in a manner ensuring that the 50 percent threshold is not exceeded. Consequently, it could be avoided that the respective DTT allocates the taxation right on the capital gains to Germany. Since the provisions of a DTT generally take precedence over national tax regulations, Sec. 49 para. 1 no. 2 lit. e) cc) ITA could not apply in such cases.

Furthermore, it should be noted that there is considerable potential for tax planning even if Sec. 49 para. 1 no. 2 lit. e) cc) ITA applies, as the relevant 50 percent threshold is determined on the basis of the book values (not on the basis of the fair market values, which may differ significantly) of the company's assets and as liabilities are not taken into account.

Moreover, according to a judgement enacted by the Federal Fiscal Court (BFH), any capital gains taxable under Sec. 49 para. 1 no. 2 lit. e) cc) ITA should be 100 percent tax exempt if the seller is a foreign company.


Although the legislator has closed a regulatory gap by introducing Sec. 49 para. 1 no. 2 lit. e) cc) ITA, there is still considerable potential for tax planning. Therefore, taxpayers contemplating a cross-border sale of real estate located in Germany should assess possible exit strategies at an early stage of the sale process.

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