EU legal action over reinvestment reserve for capital gains on the sale of real estate
The EU Commission has referred Germany to the ECJ over the tax treatment of capital gains on the sale of real estate. The EU Commission views the German regulation as a restriction on the free movement of capital, which is incompatible with the EU’s fundamental freedoms.
Under German tax law, a tax deferral can be granted for capital gains resulting from the sale of real estate, provided that these gains are reinvested. The prerequisite for this is that the real estate concerned has to have been attributed to a permanent establishment in Germany for an uninterrupted period of at least 6 years. Corporations established under German law are generally deemed to have their permanent establishment in Germany - even if they do not carry out any business activities there. The situation is different in the case of corporations that have been established under the laws of another EU or EEA Member State. These are not automatically deemed to be resident in Germany and are therefore not able to make use of the tax deferral. The EU Commission argues that this difference in treatment constitutes an unjustified restriction on the free movement of capital. It discriminates against corporations based in other EU or EEA states and hampers cross-border investments.
The Commission sent a reasoned opinion to Germany in November 2019 already and held intensive discussions with a view to finding a mutually acceptable solution. The German authorities subsequently made adjustments that the Commission however considered to be insufficient to completely eliminate the existing difference in treatment. The free movement of capital is one of the four fundamental freedoms of the European Union and essential for the European Single Market.
The legal action of the EU Commission makes it clear how important it is to harmonise national tax regulations with the requirements under EU law. Should the ECJ rule in favour of the Commission, then Germany would have to adjust its tax regulations in order to ensure that the condition for both German and foreign corporations are the same.
