Current status of the inheritance tax reform

The government coalition's inheritance tax compromise has been referred to the Mediation Committee by the Bundesrat.

It's coming, it's not coming, it's coming, it's not coming... The political tug-of-war over inheritance tax reform is increasingly reminiscent of the daisy oracle. After a long dispute, the governing coalition agreed on a reform package in June shortly before the deadline set by the Federal Constitutional Court. This was promptly passed by the Bundestag, but the Bundesrat, in its last session before the summer break, instead voiced considerable criticism of the law and referred it to the Mediation Committee.

In its resolution, the Bundesrat criticizes almost all of the provisions on the preferential treatment of business assets contained in the current draft bill. It is therefore hardly possible to forecast which changes will still be made in the course of the conciliation procedure. The only thing that is almost certain is that the new law - whatever form it takes - will come into force retroactively from July 1, 2016. This date coincides with the end of the deadline set by the Federal Constitutional Court and is already in the draft law. Until the conclusion of the mediation process, it is therefore no longer possible to make any reliable statements about the tax burden in the context of a business succession.

A quick clarification is already rather unlikely due to the parliamentary summer recess, even though the Federal Minister of Finance has clearly spoken out in favor of starting negotiations as soon as possible during the summer recess. Additional pressure is coming from the Federal Constitutional Court, which has written to the federal government, the Bundestag and the Bundesrat following the failure of a timely amendment. In the letter, the court announces that it will consider the next steps in the proceedings to review the Inheritance Tax and Gift Tax Act after the summer break at the end of September.

So far, the court has only declared the regulations in the law unconstitutional, but the old law continues to apply unchanged in the absence of new regulations. In September, the court could additionally issue an enforcement order declaring the previous regulations null and void. In this case, there would then be no tax relief for business assets at all until the legislature has agreed on a new regulation. Alternatively, the court can also make its own transitional arrangements.

However, it remains to be seen whether this will really happen, because when the legislature let a deadline set by the Federal Constitutional Court expire a few years ago, the letter from Karlsruhe was enough to motivate the parliaments to promptly amend the law. We have summarized the amendments passed by the Bundestag, which will form the basis of the mediation process, for you below so that you can get an impression of the current status of the planned preferential tax rules for business assets.

• 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: In case of election of full exemption from inheritance tax, the acquirer must observe a retention period of seven years and prove that he will not fall below the payroll of 700 % during this period.

• Small businesses: In the case of companies with up to 5 employees, the examination of the payroll total regulation is waived. For companies with 6 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, seasonal workers and those on long-term sick leave are not included.

  

• Large operating assets: In the case of the acquisition of company assets with a beneficiary asset value of more than EUR 26 million (test threshold), there is a right to choose between a test of the need for a tax exemption or a tax exemption deduction.

• Needs Assessment: In the exemption needs test, the acquirer must disclose his private assets and thus prove that he is not in a position to pay the tax from existing assets or from non-benefited assets received with the inheritance or gift. If 50 % of these assets are not sufficient to settle the inheritance or gift tax, the tax will be waived on a pro rata basis.

• Tax Credit: Alternatively, the acquirer can opt for a tax reduction model. Starting from the normal tax relief of 85 % or 100 % for assets below EUR 26 million, the tax relief decreases by 1 % for each additional EUR 750,000 above this threshold up to a beneficiary asset of EUR 90 million.

• Administrative assets: Under the previous law, an administrative asset share of up to 50 % is harmless. In the future, only the favored assets can be spared. However, administrative assets up to a share of 10 % of the business assets will be treated as preferential assets. This does not apply to young administrative assets that have been attributable to the business for less than two years. In order to ensure the liquidity of the business, cash assets, monetary receivables and other financial resources are also favored up to a share of 15 % of the business assets.

• Shareholdings and corporate groups: In multi-level corporate structures with associated companies, the beneficiary assets are determined on a consolidated basis. It is no longer possible to utilize the administrative asset share at each level of participation, as is permitted by the current law.

• Investment clause: Assets from the inheritance are not to be included in the administrative assets if, according to the will of the testator, the assets are used for investments within two years of the testator's death.

• Family business: A tax deduction of up to % 30 is planned in the event of the existence of certain restrictions typical of family businesses under the articles of association or partnership agreement. The amount of the deduction depends on the provisions in the articles of association. In addition, the deduction requires that the restrictions under company law exist for a period of at least 2 years before and up to 20 years after the transfer of assets.

• Enterprise value: A change is planned for the simplified capitalized earnings value method because the low-interest phase is leading to unrealistically high company values. Under this method, the enterprise value is derived by multiplying the sustainably achievable annual earnings by a capitalization factor. This factor, which is currently 17.86, is to be permanently limited to a corridor of 10 to 12.5.

• Tax deferral: In the case of inheritances, there is to be an entitlement to interest-free deferral of inheritance tax on business assets for up to 10 years if it is paid from private assets. The only prerequisite is that the payroll and the retention period are complied with.