It was a long time coming before the reforms to inheritance tax became finalized. The legislation has since come into force with retrospective effect as of July 1, 2016. The reforms have ramifications for company heirs.
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: The so-called “Gesetz zur Anpassung des Erbschaft- und Schenkungsteuergesetzes an die Rechtsprechung des BVerfG” [Act amending the Inheritance and Gift Tax Law (ErbStRG) in light of the case law of the Bundesverfassungsgericht (BVerfG), Germany’s Federal Constitutional Court] was passed following tough negotiations and comes into force with retrospective effect as of July 1, 2016. Company heirs can largely continue to escape inheritance tax provided they satisfy certain requirements. Notwithstanding this, they will have to adapt themselves to several changes.
Among the most significant reforms is setting the maximum factor by which the operating profit can be multiplied at 13.75 for the purposes of assessing the value of the company when calculating the tax. If an heir is not able to pay the inheritance tax, it can be deferred for a period of seven years. However, interest will then fall due from as early as the second year. Up until now, it had been possible to defer taxes interest-free for ten years.
In cases involving a transfer in the stake of a company valued at more than 26 million euros, company heirs shall have to demonstrate that paying the inheritance tax would place too great a burden on them. For the purposes of a means test, it would then also be necessary for private assets to be disclosed, half of which can be drawn on to settle the inheritance tax. If the heir rejects the needs test, the tax burden will increase with the company’s assets. In cases involving company assets valued at 90 million euros or more, a tax concession is no longer possible.
If company assets amount to less than 26 million euros, company heirs can largely continue to escape inheritance tax if they carry on the business and retain jobs. If the business continues to be operated for at least five years, it is possible to receive an exemption worth 85 per cent. The inheritance tax ceases to apply entirely if the company is carried on for seven years. Demonstrating that jobs have been retained has to be done with reference to the payroll. Firms with no more than five workers are exempt from this obligation to furnish evidence.
To ensure that optimal arrangements are made for business succession including with a view to tax, lawyers who are experienced in the fields of tax law and inheritance tax can offer advice.