The German Federal Constitutional Court’s (Bundesverfassungsgericht) ruling on inheritance tax is unsettling many businesses. Tax privileges for company heirs shall be limited going forward.
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 ruled that the favourable treatment of company heirs vis-à-vis private heirs is unconstitutional and called on the legislature to create a new regime by June 30, 2016. However, the Court also held that it is legitimate in principle to confer favourable tax treatment on family inheritances in the context of company succession in order to preserve jobs.
Yet the permissible extent of this privileging was said to be debatable. The size of the firm can be a decisive factor. Particularly large family businesses should anticipate tougher rules. Currently, a so-called needs test comes into play. Large companies can thus only reckon with tax privileges if they pass this test. It is not yet certain which criteria need to be met for this purpose, but liquidity could play a role.
Not much is expected to change for medium-sized businesses with more than 20 workers. They will have to demonstrate based on the payroll that jobs have largely been retained. Things will probably be more complicated for smaller firms. To date, they have not had to prove jobs have been preserved. This is likely to change in the future.
The German Finance Minister, Wolfgang Schäuble, has since announced that the required reforms are to be swiftly implemented, but that tax privileges for company heirs will essentially be maintained with only the contested aspects being reorganised.
That being said, many issues remain unresolved for family businesses as things stand, such as how many employees a firm must have to be considered a large business or still a medium-sized one. Family businesses seeking to make arrangements for company succession in the near future ought to address the matter at an early stage, since the existing rules continue to apply until the reform has come into effect. In order to arrange company succession in a way that is optimal from a tax perspective and avoid jeopardising the existence of the business, 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.