Purchase Agreement Not Void Due to Agreement to Evade Taxes – BGH V ZR 115/22
Despite an undeclared cash agreement, a real estate purchase agreement does not necessarily have to be invalid. This was decided by the BGH in a judgment dated March 15, 2024 (Ref.: V ZR 115/22). This is possible if the primary purpose of the purchase agreement is not tax evasion, but rather the purchase or sale of the property.
In real estate transactions, significant sums of money typically change hands. Additionally, the tax office also wants to benefit from these transactions. The temptation to “save” a little on taxes by stating a lower purchase price in the notarized purchase agreement than what was actually agreed upon and paid can be substantial. However, this is not advisable. On one hand, it constitutes tax evasion, subjecting the parties to potential criminal charges, and on the other hand, it may render the purchase agreement void, according to the commercial law firm MTR Legal Rechtsanwälte, which advises on real estate law, among other areas.
False Purchase Price Declaration in Notarized Purchase Agreement
However, a purchase agreement can remain valid despite an undeclared cash agreement, as demonstrated by the BGH ruling of March 15, 2024. In the case at hand, the parties agreed on a purchase price of 150,000 euros for the property. However, they had only notarized 120,000 euros as the purchase price in the official contract. The buyer had already paid the unnotarized 30,000 euros in cash to the seller before the notarization date.
Later, the seller admitted to reducing the real estate transfer tax through a voluntary disclosure. Subsequently, the effectiveness of the purchase agreement and its potential rescission became a matter of dispute between the seller and the buyer.
BGH: Purchase Agreement is Valid
The case eventually reached the BGH. The Karlsruhe judges first determined that the notarized purchase agreement, due to the deliberately false purchase price declaration, constituted a sham transaction and was void under § 117 (1) BGB. However, the concealed legal transaction, namely the orally concluded purchase agreement for the property at the higher purchase price, was valid. The formal defect was remedied by the conveyance and the entry of the buyer into the land register. Thus, the buyer became the owner of the property. This would only be different if the purchase agreement were void.
However, this was not the case, according to the BGH. The undeclared cash agreement does not lead to the invalidity of the entire purchase agreement due to a violation of a statutory prohibition. When the purchase price is stated lower in the notarization of a real estate purchase agreement than what was orally agreed upon to evade taxes, an undeclared cash agreement is present. However, this does not render the purchase agreement void. The agreement is only void if the intent to evade taxes was the sole or primary purpose of the agreement. This is generally not the case if the purchase or sale of the property is genuinely intended. A contract that involves tax evasion is only void if the tax evasion constitutes the primary purpose of the contract, the Karlsruhe judges further explained.
Distinction from Undeclared Cash Agreements in Service Contracts
They clearly distinguished their jurisprudence on real estate and land purchase agreements from that on undeclared cash agreements in service contracts. Agreements in service contracts that lead to a party not fulfilling their tax obligations can lead to the voiding of the entire contract under the Combatting Undeclared Work Act. However, these regulations are not applicable to undeclared cash agreements in the context of real estate purchase agreements, according to the BGH.
While the agreement to state a false purchase price is legally objectionable, it only affects the entire contract if the prohibited tax evasion is the intended primary purpose of the contract, the BGH clarified. Accordingly, the purchase agreement in the present case was not void due to the undeclared cash agreement. The real estate transaction was genuinely intended. The genuine intent to exchange services is evidenced by the conclusion and execution of the purchase agreement, the BGH stated. Even though the undeclared cash agreement is void in itself, this does not lead to the invalidity of the entire contract.
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