If the property purchase does not go through – and the tax remains

Anyone buying a plot of land in Germany usually pays land transfer tax on the purchase. Depending on the federal state, the tax amounts to between 3.5 and a maximum of 6.5 per cent of the purchase price. The tax becomes payable as soon as the purchase contract is signed, even if ownership of the land is not transferred until a later date. If the contract is rescinded before ownership has been transferred, the land transfer tax already paid can be refunded upon application. But does this also apply if cohabiting partners purchase a plot of land jointly and one of them subsequently withdraws from the contract? The Federal Fiscal Court recently had to rule on this in case II R 24/23.

In the case in question, the claimant and her then partner jointly purchased a developed plot of land. Under the terms of the contract of sale, they were to become co-owners, each holding a 50 per cent share. The purchase price was not due for payment until approximately one year later. Shortly after the contract of sale was signed, the tax office assessed a land transfer tax payable by each of the two partners, taking half of the purchase price into account for each. A few months later, the couple separated. By means of a second contract, the claimant withdrew from the original purchase agreement. Her former partner became the sole owner of the plot of land. The claimant then claimed a refund of the land transfer tax she had already paid from the tax office, on the grounds that the purchase transaction had been rescinded.

However, the tax office rejected this. It argued that the conditions for rescinding the purchase agreement had not been met in this case, and that the land transfer tax could therefore not be refunded. Rather, it contended that the former partner had taken over the contract. The subsequent appeal to the Finance Court was successful. The tax office then lodged an appeal against this decision with the Federal Finance Court. 

The court ruled in favour of the tax office. It found that the sale and purchase agreement had not been rescinded. Although the claimant was no longer the purchaser under the second contract, the legal transaction remained in full force. The seller lost the power of disposal over the property to the former partner. The fact that, under the terms of the contract of sale, each of the two purchasers acquired a 50 per cent share of co-ownership did not preclude this either. According to the wording of the contract of sale, the property could only be transferred in its entirety; individual shares of co-ownership could not be transferred separately. The partner had therefore only acquired the claimant’s share, without the purchase agreement having been fully rescinded under civil law. The latter, however, is a prerequisite for the revocation of the previous tax assessment. The claimant could therefore not be refunded the land transfer tax.

This case illustrates that the terms of a property purchase agreement should be carefully considered. Anyone who jointly acquires a plot of land and later wishes to rescind the purchase should be aware that, in order to obtain a refund of the land transfer tax, the entire contract of sale – involving all purchasers and the seller – must be rescinded; the mere withdrawal of one contracting party is not sufficient. It is therefore advisable to assess, at the drafting stage, whether alternative arrangements might be more favourable from both a tax and a civil law perspective.