Agreement on inheritance tax on business assets

On July 8, 2015, the German government passed a bill to adapt the Inheritance and Gift Tax Act to the case law of the Federal Constitutional Court.

In its ruling of December 17, 2014, the German Federal Constitutional Court considered the exemption rules for business assets to be fundamentally suitable and necessary to ensure the continued existence of companies and to preserve jobs. However, the court considered the design of the exemption regulations to be partially unconstitutional. Since this ruling, the battle for a new regulation of inheritance and gift tax on business assets has been raging.

In June, several months late, the Federal Ministry of Finance published a draft bill for the new regulation, which promptly reignited criticism. While the business community thought the changes went too far, the SPD considered the draft unconstitutional because it considered the alternative to the needs test for large business assets too generous. In the meantime, the grand coalition has gotten its act together again and passed a joint government draft. Provided the federal states do not still raise objections in the Bundesrat, the following changes are planned for inheritance tax on business assets:

• Administrative assets: The previous inheritance and gift tax law provides for exemption if the business assets reach an administrative asset share of up to 50 %. This was deemed disproportionate by the Federal Constitutional Court. The draft law provides that in future only assets that are eligible for tax relief can be spared. Accordingly, assets and other assets which, according to their main purpose, predominantly serve a commercial, freelance or agricultural and forestry activity are eligible for tax relief.

• Shareholdings and corporate groups: In multi-level corporate structures with investment companies, the beneficiary assets are determined on a consolidated basis. Utilization of the administrative asset share of 50 % at each investment level, as permitted by the current law (so-called cascade effects in investment companies), is no longer possible thereafter.

• Rule sparing: As under the previous law, the beneficiary assets are exempt from tax at the option of the acquirer at 85 % or 100 % if certain conditions are met. If the acquirer opts for the standard exemption of 85 %, he must continue the business for at least five years and prove that the total payroll does not fall below 400 % of the initial payroll within five years of the acquisition (payroll regulation).

• Option Verschonung: If the full exemption from inheritance tax is chosen, the acquirer must observe a retention period of seven years and prove that he or she will not fall below the payroll of 700 % during this period.

• Old payroll rule: Companies with up to 20 employees were previously completely exempt from the wage sum regulation. This limit has been rejected by the Federal Constitutional Court. The draft law therefore provides that the requirements increase with the number of employees.

• New payroll rule: In the case of companies with up to 3 employees, the examination of the payroll total regulation is waived. For companies with 4 to 10 employees, the payroll must not fall below 250 % of the initial payroll within the five-year retention period. For the option exemption, the wage total is 500 % within seven years. For companies with 11 to 15 employees, wage totals of 300 % and 565 % apply accordingly. No relief is provided for 16 employees or more. Employees on maternity or parental leave, apprentices and those on long-term sick leave are not included.

• Large operating assets: In the case of the acquisition of business assets with preferential assets of more than EUR 26 million (test threshold), the draft law provides for a right to choose between a test of the need for tax relief or a special tax relief discount. In the event of certain restrictions typical of family businesses under company agreements or the articles of association, the test threshold is doubled to EUR 52 million.

• Needs Assessment: In the exemption needs test, the acquirer must prove that he or she is not in a position to pay the tax from existing assets or from non-preferred assets received with the inheritance or gift. If these assets are not sufficient to pay the inheritance or gift tax, the tax is waived.

• Tax Credit: As an alternative to the needs test, the acquirer can opt for a Verschonungsabschmelz model. Starting from the normal tax relief of 85 % or 100 % for assets below EUR 26/52 million, the tax relief decreases by 1 % for each additional EUR 1.5 million that the acquisition exceeds the respective test threshold up to a beneficiary asset of EUR 116/142 million. From EUR 116/142 million, a uniform exemption discount of 20 % (for a holding period of five years) or 35 % (for a holding period of seven years) then applies.