Is Connecticut's controlling interest transfer tax due when a parent merges a subsidiary into its own subsidiary that owns real estate, if the parent controls the property both before and after?

Plain-English summary

Connecticut has a controlling interest transfer tax — a tax that applies when someone sells or transfers a controlling interest (more than 50% of the voting power) in a company that owns Connecticut real property worth at least $2,000. It's designed to catch situations where real estate effectively changes hands not by deeding the land, but by transferring control of the entity that owns it.

Here the structure was a three-tier corporate chain: parent P owned first-tier subsidiary S1, which owned second-tier subsidiary S2, and S2 owned the Connecticut real property. The plan: merge S1 into S2, with S2 surviving. P's shares in S1 would be cancelled and P would receive shares in S2, so after the merger P would directly own S2. The company asked whether that intragroup merger triggered the controlling interest transfer tax.

DRS said no. The tax has six required elements (from LSN-89), and a taxable transfer must involve a transfer of ultimate control. Before the merger, P controlled the real estate indirectly (P → S1 → S2). After the merger, P controls it directly (P → S2). But ultimate control never changed — P controlled the property the whole time, before and after. Because this was a merger within a controlled group of wholly-owned subsidiaries, no controlling interest actually passed to anyone new, so the transfer-of-controlling-interest requirements weren't met and the tax didn't apply.

DRS grounded this in its earlier rulings: a merger of a wholly-owned subsidiary into its parent isn't taxable because the transferor and transferee are the same (Ruling No. 91-2), and the merger of one first-tier subsidiary into another first-tier subsidiary of the same parent isn't taxable because the first two of LSN-89's six elements aren't present (Ruling No. 98-3). This case — a first-tier subsidiary merging into its own subsidiary — follows the same logic: rearranging the chain of ownership within one controlled group doesn't move ultimate control.

What this means for you

Corporations and corporate groups reorganizing entities that hold real estate

Internal restructurings that only shorten or rearrange the ownership chain — merging a holding subsidiary into an operating subsidiary, or a subsidiary into its parent — generally don't trigger Connecticut's controlling interest transfer tax, because the same ultimate owner controls the real estate before and after. The tax is aimed at real transfers of control to a new party, not at housekeeping within a wholly-owned group. Still, map each step: the exemption depends on no change in ultimate control, so a reorganization that brings in an outside interest or shifts control could be a different story.

M&A and real-estate counsel

The analytical key is "transfer of ultimate control," not the mechanical form of the merger or whether control becomes direct vs. indirect. Test each of LSN-89's six elements — especially the first two (a transferor transferring a controlling interest, and a transferee receiving it). If the same parent controls throughout, elements one and two fail and there's no taxable transfer.

Accountants and tax professionals

Operative statute: § 12-638b (tax on transfer of a controlling interest in an entity owning Connecticut realty worth $2,000+); "controlling interest" is more than 50% of voting power under § 12-638a(2)(A). The six-element framework is in LSN-89, and DRS's controlled-group line runs through Ruling No. 91-2 (sub-into-parent) and Ruling No. 98-3 (sibling first-tier subs). Confirm the transaction stays entirely within a wholly-owned group so ultimate control is unchanged.

Common questions

Q: What is Connecticut's controlling interest transfer tax?
A: A tax under § 12-638b on the sale or transfer of a controlling interest (more than 50% of voting power) in an entity that owns Connecticut real property worth $2,000 or more — a way of taxing real estate that changes hands via entity control rather than a deed.

Q: Does an internal merger within a corporate group trigger it?
A: Generally no. If the merger only rearranges ownership within a wholly-owned controlled group and the same parent controls the real estate before and after, there's no transfer of ultimate control and no tax.

Q: Does it matter that control went from indirect to direct?
A: No. DRS focuses on whether ultimate control changed. Going from indirect control (through a subsidiary) to direct control of the same property, within the same group, is not a taxable transfer.

Q: When would such a reorganization be taxable?
A: When it actually transfers a controlling interest to a different party — i.e., ultimate control changes. The six elements in LSN-89 must all be present for the tax to apply.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-638b (tax on the sale or transfer of a controlling interest in an entity owning Connecticut real property worth $2,000 or more)
• Conn. Gen. Stat. § 12-638a(2)(A) (definition of "controlling interest": more than 50% of a corporation's combined voting power)

Administrative guidance and prior rulings:

• LSN-89, Revised Special Notice Concerning Controlling Interest Transfer Taxes (Rev. 7/90) (the six elements of a taxable transfer)
• Ruling No. 91-2 (subsidiary-into-parent merger not taxable); Ruling No. 98-3 (merger of sibling first-tier subsidiaries not taxable)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 99-6

Original ruling text

Ruling 99-6, Controlling Interest Transfer Taxes

FACTS:

P , a parent corporation of a controlled group , owns all of the shares of S1 , a first-tier subsidiary corporation. S1 owns all of the shares of S2 , a second-tier subsidiary corporation that owns Connecticut real property, the present true and actual value of which is not less than $2,000. S1 will merge into S2 , with S2 being the surviving corporation. Pursuant to the merger, P’s shares in S1 will be cancelled and P will receive shares in S2 . After the merger, P will directly own all the shares of S2 .

ISSUE:

Within a controlled group, will the merger of a first-tier subsidiary into its own subsidiary, which owns Connecticut real property, be a sale or transfer subject to the controlling interest transfer tax where the parent corporation that indirectly controlled the corporation holding the real estate before the merger directly controls the corporation holding the real estate after the merger?

DISCUSSION:

Conn. Gen. Stat. §12-638b imposes a tax "on the sale or transfer of a controlling interest in any entity which possesses an interest in real property in this state when the present true and actual value of the interest in real property equals or exceeds two thousand dollars ...." "Controlling interest" is defined in Conn. Gen. Stat. §12-638a(2)(A) as meaning "in the case of a corporation, more than fifty per cent of the total combined voting power of all classes of stock of such corporation ..."

The elements of a taxable transfer, all six of which must be present, are set out in LSN-89 , Revised Special Notice Concerning Controlling Interest Transfer Taxes (Rev. 7/90):

A transferor (or a group of transferors acting in concert) must transfer a controlling interest in an entity.

The controlling interest must be transferred to a transferee (or a group of transferees acting in concert).

The transfer must be for consideration.

The entity must own Connecticut real property.

The present true and actual value of the Connecticut real property must not be less than $2,000.

The transfer of a controlling interest must occur on or after July 1, 1989.

The Department has ruled that a merger involving a wholly-owned subsidiary and its parent corporation, where the parent corporation is the surviving corporation, is not subject to the controlling interest transfer tax, because the transferor and the transferee are the same. Ruling No. 91-2 .

The Department more recently ruled that "[the merger of a first-tier wholly-owned subsidiary of a parent corporation into another first-tier wholly-owned subsidiary of the same parent corporation is not a sale or transfer subject to the controlling interest transfer tax." Ruling No. 98-3 . "Such a merger does not constitute a taxable sale or transfer of a controlling interest, because the first two of six elements of a taxable sale or transfer that are set out in LSN-89 are not present, and, in order for a taxable sale or transfer to occur, all six of the elements must be present." Id .

The two rulings discussed above instruct us that a transfer of ultimate control is necessary for the tax to apply. Here, because there is a merger within a controlled group of wholly-owned subsidiaries, ultimate control has not changed. Initially, P’s control of the Connecticut real property was indirect, through its ownership of S1 , whereas after the merger P’s control of the property is direct, through its 100% ownership of S2 . Thus, while S2 will be directly controlled by P after the merger, S2 was indirectly controlled by P prior to the merger. However, since this is a merger within a controlled corporate group of wholly-owned subsidiaries, the merger of S1 into S2 does not result in a transfer of the ultimate control of the Connecticut real property that is owned by S2 . As a result, the merger is not deemed to be a transfer of a controlling interest.

RULING:

Within a controlled corporate group, the merger of a first-tier subsidiary of a parent corporation into its own subsidiary, which owns Connecticut real property, is not a transfer subject to the controlling interest transfer taxes where the same interest that indirectly controls the corporation holding the real estate before the merger, directly controls the corporation holding the real estate after the merger.

LEGAL DIVISION

Issued November 1, 1999