Inheritance tax is partially unconstitutional

The preferential treatment of business assets in inheritance tax is unconstitutional in its current form.

Shortly before Christmas, the Federal Constitutional Court declared the current inheritance tax law to be unconstitutional. The ruling relates to the preferential rules for business assets, which the court considers to be disproportionately high. Although the provisions continue to apply for the time being, the legislator must find a new regulation for the contested provisions by June 30, 2016.

In particular, the Constitutional Court takes issue with the preferential treatment of large companies without a needs test and of companies with a high proportion of administrative assets. However, the court expressly stated that the legislator may, in principle, grant preferential tax treatment to small and medium-sized owner-managed companies in order to secure their existence and maintain jobs. The Constitutional Court made five important findings:

• In principle, the legislator has the right to largely or even completely exempt small and medium-sized companies from inheritance tax in order to safeguard their existence and thus preserve jobs, especially if they are managed by the owner. However, it needs viable justifications for any tax exemption. The requirements for justification increase with the scope and extent of the deviation from the tax burden decision once it has been made.

• The privileged treatment of transfers of business assets is disproportionate if it goes beyond the exemption of small and medium-sized enterprises without providing for a needs test. However, the Federal Constitutional Court does not specify exactly where the line should be drawn or what such a needs test could look like.

• Although the wage bill regulation is fundamentally constitutional, the exemption from the minimum wage bill disproportionately privileges the acquisition of businesses with up to 20 employees. Whether the exemption is abolished completely or restricted to micro-enterprises with a maximum of 5 employees is at the discretion of the legislator.

• The regulation on administrative assets is unconstitutional because it exempts the acquisition of tax-privileged assets without restriction, even if they consist of up to 50 % of administrative assets, without there being a viable justification for this. Administrative assets will therefore only be able to remain tax-exempt to a very limited extent in future.

• Even though inheritance tax is a state tax, federal legislation is in the interests of the state as a whole if it is essential for legal or economic unity. There will therefore be no different tax rates for inheritance tax in different federal states for the time being.

In an initial statement by the Federal Ministry of Finance, the ministry has already indicated that it intends to maintain the preferential treatment of business assets in the future, even if this preferential treatment now has to be structured differently. The fact that the grand coalition will still be in office for a few more years also suggests that it is more likely that repairs will be made to the existing law than radical changes in one direction or another. At the beginning of 2015, the ministry intends to discuss the next steps with the federal states that are entitled to the inheritance tax income.

Although the Federal Constitutional Court has set a deadline for a new regulation, it has also made it clear that the new regulation may come into force retroactively if the legislator so wishes. Against this backdrop, the most exciting question for the time being is whether the unavoidable changes will be brought into force retrospectively. The tax authorities want to keep the option open by only issuing tax assessments provisionally. As the federal states are currently looking for new sources of revenue due to the debt brake, it cannot be ruled out that the states will insist on such a regulation if they expect it to generate more tax revenue.