The 2007 special session of the Maryland General Assembly enacted legislation requiring that recordation and transfer taxes be collected on transfers of controlling interests in certain real property entities. The recordation and transfer taxes are imposed on the transfer of a controlling interest in a real property entity as if the real property (whether directly or beneficially owned by the entity) was conveyed by a deed filed in the county land records.
Real Property entity means “a corporation, partnership, association, limited liability company, limited liability partnership, other unincorporated form of doing business or trust that directly or beneficially owns real property in Maryland that constitutes 80% of the value of its assets and that real property has an aggregate value of at least $1,000,000.” Tax-Property Article, §12-117 (a)(6). It does not include land related to agricultural production and subject to an agricultural use assessment.
A plan of transfer means an intentional plan or program to transfer the controlling interest in a real property entity in two or more steps. The taxes will be applied for all of the steps in the plan.
The report must be filed where more than 80% of the value of the controlling interest is transferred. The determination of the 80% amount is based on an accurate statement of value, and generally it is not dependent on the number of shares, other units of ownership interest, or the par value assigned to those interests. The Department has created a “permissive” filing where an entity may submit a report (without the payment of recordation or transfer taxes) for a determination by the agency and for a record filing that the value is between 50% and the 80% controlling interest standard.
There are no taxes due if the transfer of a controlling interest effected in more than one transaction is completed over a period of more than 12 months, and there is a legitimate business purpose (other than tax avoidance) for utilizing that time period. The report must be filed with the Department because this time frame is an exemption under the law, and the real property entity has the burden of establishing to the satisfaction of the Department the applicability of that exemption.
The specific exemptions allowed in Tax-Property Article §§ 12-108 and 13-207 when real properties are transferred by an instrument of writing recorded with the Clerk of Circuit Court for a county are applicable to transfers of controlling interests. The Department will allow the same exemptions that have been permitted by the Clerks of Circuit Court. The Department also will allow any “local” county exemptions to the county taxes. Any real property entity claming these types of exemptions must submit the report of a transfer of controlling interest to the Department.
There are other exemptions for: (1) multi-step transfers that are not part of the same plan of transfer; (2) a transfer of a controlling interest in a real property entity to another business if the ownership interests in the transferee business entity are held by the same persons and in the same proportion as in the real property entity being transferred; (3) a transfer of a controlling interest in a real property entity where each transferor, each transferee, and each real property entity is a subsidiary corporation where all of the stock is owned, directly or indirectly by a common parent corporation; (4) a transfer of a controlling interest in a real property entity if each transferor, transferee and real property entity in a partnership where all of the interests are owned, directly or indirectly, by one or more subsidiaries or the common parent; (5) if transfer of a controlling interest is a real property entity where each transferor, transferee or real property is the common parent corporation; and (6) the transferee of the controlling interest in the real property entity is a nonstock corporation and a continuing care retirement community. Again, the claming of these exemptions require the real property entity to submit a report to the Department.
The law does not apply to: (1) an entity with land holdings (other than homesites or commercial agricultural production activity) that are entirely subject to an agricultural assessment; (2) a series of sales of shares of a publicly traded entity; (3) a pledge of stock or other interest in a real property entity as a security for a loan; and (4) the admission to the real property entity of additional shareholders, partners, beneficial owners, or other members to raise additional capital through the offering of stock where the management of the real property entity is not substantially changed and none of the new members participate in the day-to-day management of the real property entity. These exclusions do not require the real property entity to submit a report to the Department.
Most REITs would not have any requirement to file a report with the Department because of the exclusion in the law providing that there is no plan of transfer where there is a series of sales of shares of a publicly traded entity. Moreover, the separate statutory provision requiring that 80% of the real property be located in the State of Maryland would exclude most REITs from filing. A REIT does not have to file a report with the Department to claim either of these exclusions.
All debts, including mortgages, deeds of trust, liens, security interests, unsecured debts or other encumbrances of the real property entity or its subsidiaries, are part of the consideration subject to the imposition of the taxes.
The report must be submitted and the taxes paid within thirty (30) days of the date of the final transfer.
The Department will make an assessment of the taxes due, apply a penalty of 10% of the unpaid amount, and interest will accrue on the unpaid amount at the rate of 1% per month.
There are misdemeanor penalties and fines provided at Title 14, Subtitle 10 of the Tax-Property Article, specifically §§ 14-1001- to 14-1004.
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