20. Sep 16

Inheritance tax reform: More stringent requirements for company heirs

Germany’s federal government has settled on reforms to inheritance tax. Company heirs can continue to expect favourable tax treatment in the context of business succession.

GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London conclude: The Bundesverfassungsgericht, Germany’s Federal Constitutional Court, delivered a ruling at the end of 2014 requiring that inheritance tax be reformed. The preferential treatment accorded to company heirs was said to be unconstitutional in its current form. However, the Court also stated that privileging company heirs within the scope of business succession in order to maintain jobs is in principle legitimate. Having said that, it went on to say that there needs to be limits to this preferential taxation vis-à-vis private heirs. Currently, company heirs can benefit from an 85 to 100 per cent exemption from inheritance tax if they continue to run the business for five to seven years and largely preserve jobs.

The Bundesverfassungsgericht had set a deadline of June 30, 2016 for the reform of inheritance tax. The coalition government now appears to have succeeded in reaching a compromise in the nick of time. Assuming the approval of the Bundestag and Bundesrat, Germany’s lower and upper houses of parliament, the legislation is expected to be passed before the summer recess. The compromise stipulates that company heirs shall in large part be able to continue to benefit from exemptions from inheritance tax if they carry on running the business and maintain jobs. Notwithstanding this, the requirements have become more stringent.

For instance, a needs test will be carried out in cases involving business assets totalling 26 million euros or more for each incidence of succession, i.e. company heirs will have to prove that inheritance tax would place excessive financial pressure on them. To this end, they also need to disclose their private assets, 50 per cent of which can then be drawn on for the purposes of taxation. If the inheritance tax is paid for from the heir’s private assets, he may be granted up to a ten-year interest-free deferment. In the case of a gift, however, this is not possible. In cases involving company assets worth 90 million euros or more, there will be no exemption from inheritance tax.

Small businesses shall have to adjust as well. It will only be firms with up to a maximum of five employees that won’t bear the burden of proof concerning the preservation of jobs going forward. The threshold has hitherto been set at 20 employees.

Company heirs will have to prepare themselves for greater tax burdens as part of business succession. In order to find an optimal solution when a company is being passed on, company heirs can turn to lawyers and tax advisors who are experienced in the fields of succession law and tax law.

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