28. Oct 16

Inheritance tax reforms becoming an impasse – Making arrangements for business succession

The reforms to inheritance tax should have been cut and dried long ago. The Bundesverfassungsgericht (BVerfG), Germany’s Federal Constitutional Court, is now once again exerting pressure because of the failure to reach an agreement on policy.

GRP Rainer Rechtsanwälte, Köln, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, München und Stuttgart führen aus: The reforms to inheritance tax really ought to have been done and dusted by the end of June. Yet the reforms are increasingly becoming an impasse and leave firms that will soon be faced with business succession up in the air.

The Bundesverfassungsgericht had already concluded at the end of 2014 that the favourable treatment for company heirs is in part unconstitutional. Appropriate reforms were supposed to be implemented by the end of June 2016, but the bill hit a brick wall in the Bundesrat, Germany’s upper house of parliament. The draft legislation shall now go to a body known as the Vermittlungsauschuss (Mediation Committee). This means that the BVerfG might itself bring into effect transitional arrangements. For the time being, however, the existing rules continue to apply.

The Bundesrat still believes that the federal government’s bill is too lenient on company heirs. The draft legislation stipulates that company heirs can continue to benefit from tax privileges if they retain the company and jobs for at least seven years. However, the prerequisites for this favourable treatment in relation to inheritance tax were set to become more stringent. Small businesses with no more than five employees would be able to benefit from this without having to prove that jobs had been retained, whereas this would only apply to businesses with up to 15 workers if they could demonstrate that jobs had been maintained with reference to the wage bill and if the business assets do not exceed 26 million euros in a given incidence of succession. In cases involving larger amounts of business assets, a needs test or alternatively an abatement model would be introduced.

With these proposals blocked for now and the Constitutional Court potentially laying out transitional rules, the reforms may end up less favourable for company heirs. In order to make arrangements for business succession that are optimal from a tax perspective while not jeopardizing the firm’s continued existence, businesses can turn to lawyers who are versed in the fields of succession law and tax law.

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