Inheritance tax must be reformed by mid-2016. That was a ruling of the German Federal Constitutional Court (Bundesverfassungsgericht) at the end of 2014 based on the view that company heirs presently enjoy excessive favourable treatment.
GRP Rainer Lawyers and Tax Advisors in Cologne, Berlin, Bonn, Düsseldorf, Frankfurt, Hamburg, Munich, Stuttgart and London - www.grprainer.com/en conclude: On December 17, 2014, the Bundesverfassungsgericht found the favourable treatment enjoyed by company heirs compared with private heirs to be unconstitutional in its current form. The legislature must now implement appropriate reforms by mid-2016. Yet the Bundesverfassungsgericht also stated that it is legitimate as a matter of principle to provide favourable tax treatment for company heirs in the context of company succession so as to preserve jobs.
It is debateable, however, how far this privileging extends. Criticism was thus voiced, for example, that small firms with up to 20 workers do not need to furnish evidence of the retention of jobs. Furthermore, it was discussed whether large family businesses can continue to expect to benefit from tax privileges. They may have to demonstrate based on a needs test that they would suffer economically because of inheritance tax. It has yet to be decided how inheritance tax will be reformed.
That being said, the German Finance Minister has already announced that the new arrangements are to be swiftly implemented and manageable in scope. Handelsblatt reports that the head of his tax department presented their initial considerations at an event held by “Stiftung Familienunternehmen” (Foundation for Family Businesses). One of the considered proposals, for instance, is that all businesses with a payroll of more than one million euros should in future have to demonstrate that this payroll has been maintained over a period of seven years for them to be able to claim tax concessions. The point at which a family business is considered to be large is completely unclear at the moment. One possibility would be to define this based on turnover. The cabinet is to be presented with an appropriate inheritance tax reform bill shortly after Easter.
The head of the tax department also announced that retroactive effect back to December 17, 2014 shall only apply to the new rules in exceptional cases. Family businesses that have to deal with company succession soon should therefore act promptly so as to benefit from the tax privileges. In order to arrange company succession in a way that is optimal from a tax perspective and not jeopardise the company’s existence, businessmen can turn to lawyers and tax advisors who are experienced in the field of tax law and are able to provide them with expert advice on company succession from the outset.