Cross-border migration of German real estate companies is generally possible, however its admissibility must be determined on a case-by-case basis.
International real estate investors continue to favour German real estate, however, the same does not always apply to German real estate companies. International real estate investors, for instance, often find German capital maintenance rules too strict because such rules, inter alia, complicate the withdrawal of liquidity and the cross-collateralization of financing taken out by other portfolio companies. In addition, real estate companies that are permanently established in Germany may be subject to German trade tax, which hinders many business plans. Some international real estate investors who invest through the Netherlands or Luxembourg prefer, for convenience purposes, entities established under those legal systems. Therefore, investors consistently question whether a cross-border migration of German real estate companies is possible. In this context, real estate investors must distinguish between a mere transfer of the administrative seat, i.e., the place where the essential day-to-day decisions are made, and a transfer of the company’s statutory seat, i.e., a conversion of a German company into a foreign company.
Cross-border merger
German law does not provide specific rules for cross-border migration. Pursuant to sections 122a seqq. of the German Transformation Act, merging a German entity into another entity established under the laws of an EU Member State is possible. However, as a cross-border merger usually cannot be implemented without triggering real estate transfer tax, this procedure is usually not relevant in practice.
Transfer of the administrative seat without changing the legal form
In order to avoid German trade tax, investors quite often try to transfer (only) the administrative seat of their German real estate company (so-called non-PE-structure, i.e. a company structure without permanent establishment in Germany). Therefore, while the relevant company survives e.g., in the form of a German limited liability company, its business is henceforth managed from abroad without a permanent establishment in Germany. This procedure is known as a transfer of the administrative seat without changing the legal form. Many German courts and commentators have denied the admissibility of the procedure for many years, however, today more differentiated views exist and the issue is fiercely debated.
Three-prong test
Firstly, investors must differentiate whether the company that is to migrate is a corporation (mainly a stock company or a limited liability company) or a partnership (mainly a limited partnership or a general commercial partnership). Secondly, investors must determine if the state to which the administrative seat shall be transferred (the “host state”) applies the administrative seat theory or the incorporation theory. According to the administrative seat theory, which is traditionally applied, for instance, in Germany and Luxembourg, the company is subject to the legal system of the state where its administrative seat is located. According to the incorporation theory, which is applied, for instance, in Great Britain and the Netherlands, the company is subject to the legal system of the state of its incorporation. Thirdly, investors must determine if the host state is located within or outside of the European Union.
Applying this test is often complicated both in theory and in practice, as evidenced in the following examples.
Examples
If a German limited liability company transfers its administrative seat to the Netherlands, the general opinion today is that the company continues to exist as a German limited liability company. The justification for this varies, however. According to some legal commentators, the administrative seat theory applies to German corporations transferring their administrative seat out of Germany. Therefore, after the company’s migration from Germany to the Netherlands, Dutch law would be applicable to the company. However, as Dutch law itself applies the incorporation theory, Dutch law refers back to German law. If the limited liability company has been validly incorporated under German law, the company thus can continue to exist as such. According to other legal commentators, section 4a of the German Limited Liability Companies Act contains a so-called “hidden conflict-of-laws rule.” This rule is claimed to indicate that today the incorporation theory applies to German corporations transferring their effective seat outside of Germany. Therefore, once a company is incorporated as a German limited liability company, the company retains its legal form even after transferring its administrative seat to the Netherlands. Therefore, the limited liability company continues to exist as such according to this view as well.
The issue becomes more complicated if the administrative seat of a German limited liability company is transferred to Luxembourg. According to those who believe that section 4a of the German Limited Liability Companies Act implements the incorporation theory, the transfer of the administrative seat to Luxembourg is admissible without changing the legal form. Therefore, the German limited liability company continues to exist as such. If the administrative seat theory is applied instead, the cross-border transfer of the administrative seat would initially trigger the application of Luxembourgian law. As Luxembourg traditionally applied the administrative seat theory as well, Luxembourgian law would not refer back to German law but would remain applicable. Consequently, the German limited liability company would, under German law, not be able to exist permanently as such and would need to be liquidated. The company would not automatically exist as a Luxembourgian corporation either as the Luxembourgian rules of incorporation were most likely not complied with. At best, the German limited liability company under Luxembourg law might continue in the form of a Luxembourgian general partnership. How such Luxembourg general partnership and the German limited liability company in liquidation would relate to each other is unclear. The limitation of liability under German corporate law arguably would fall away in this scenario, at least for new liabilities that are not incurred in connection with the liquidation. However, arguably, this conflicts with the jurisprudence of the European Court of Justice in the Cartesio case. In Cartesio, the European Court of Justice held that the EU Member States are obliged to allow the inbound transfer of the administrative seat of companies incorporated under the laws of another Member State. Essentially, therefore, in such a scenario, the incorporation theory should apply. Though doubts about this view remain, many EU Member States now seem to follow this approach. Nevertheless, at least if the administrative seat of a German limited liability company is transferred to a state outside of the EU, according to this view the German company may not continue to exist permanently as such.
For partnerships, the legal situation differs again, as partnerships are not governed by a rule such as section 4a of the German Limited Liability Companies Act. Therefore, the prevailing view is that the administrative seat theory applies to partnerships. Furthermore, according to this view, the administrative seat for partnership must always be in Germany. Therefore, a transfer of the administrative seat without changing the legal form would not be possible. According to many legal commentators, this is the case regardless of whether the host state applies the administrative seat or the incorporation theory.
Cross-border conversion
A cross-border conversion occurs when a German company transfers its statutory seat abroad, and the company is converted into a legal form of the host state but maintains its identity. For example, if a German limited liability company is to become a Dutch limited liability company, German law does not contain an explicit provision for this scenario. However, in the Vale case, the European Court of Justice held that generally both the incorporation state and the host state have to allow a cross-border conversion if the statutory and the administrative seats are both transferred abroad at the same time. Most recently, in the 2017 Polbud case, the European Court of Justice went even further. According to Polbud, a cross-border conversion shall be allowed even if the administrative seat remains in Germany and only the statutory seat is transferred abroad. However, for real estate companies also transferring the administrative seat is often crucial for the above mentioned trade tax reasons. Consequently, the Polbud ruling does not seem to be of great importance for real estate companies.
German legal practice currently manages the implementation of cross-border conversions by applying the German rules on domestic conversions. Details are naturally controversial and the involved commercial registers have different requirements in this regard. In addition, investors must observe the formal requirements of the host state. In practice, working in close coordination with the competent German and foreign commercial registers is imperative.
Conclusion
Cross-border migration of German real estate companies is one of the most complex topics in German law. German and foreign company law, private international law, European Union law, and tax law interact closely in this context. Nowadays, due to European requirements, cross-border migration is possible in many cases. However, before leaving Germany too quickly, a detailed examination of the admissibility of a cross-border migration in the individual case is necessary.