This question will be relevant for the successors of many family businesses as a consequence of the recent reform of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz).
With steady regularity, the Federal Constitutional Court finds that the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, “Inheritance and Gift Tax Act”) is incompatible with the German Basic Law (Grundgesetz). With a judgment dated December 17, 2014, the Constitutional Court tasked the legislator with, by July 1, 2016 at the latest, creating a new arrangement for the preferential treatment of business assets that, as part of the Inheritance and Gift Tax Act, exempted the heirs from a tax burden jeopardizing the continuation of the enterprise. 1 Thereupon, the Inheritance and Gift Tax Act was amended with effect for all inheritances and gifts for which the tax accrues after June 30, 2016.
The principal subject matter of the reform was a modification of the preferential treatment of business assets governed in § 13a and 13b of the Inheritance and Gift Tax Act, whereby the general scheme of giving preferential treatment to business assets and the definition of business assets were maintained. There were significant changes, particularly regarding the aggregated wages rule (Lohnsummenregelung), which is now to be applied when there is more than five employees.
Furthermore, the reform introduced a value limit of 26 million euros, from which, in principle, the preferential treatment of business assets no longer applies. However, in these cases – so-called “large-scale trades” – upon an application in accordance with § 13c of the Inheritance and Gift Tax Act (new version), a preferential treatment of business assets reduced by one percentage point for each full 750,000 euros may be granted. From a value of assets of 90 million euros, within the framework of the special provision of § 13c of the Inheritance and Gift Tax Act, preferential treatment of business assets is no longer granted.
Alternatively, however, in accordance with § 28a of the Inheritance and Gift Tax Act (new version), a so-called “exemption needs test” (Verschonungsbedarfsprüfung) is to be undertaken, with which, upon application, the tax may be abated to the extent that such tax cannot be settled from so-called “available assets” (verfügbare Vermögen) (that is, half of the assets not falling under the preferential treatment of business assets), regardless of whether such assets were acquired with the inheritance / gift or the acquirer is entitled to such assets independent of the inheritance / gift. The abatement is not possible to the extent that the assets have to be transferred to third parties (for example, because of a bequest) or the aggregated wages rule or the maintenance period are not adhered to. In addition, the exemption is rendered inapplicable if additional available assets are acquired within ten years.
In summary, it can be stated that, for some business owners, succession can become a “sour” experience, if a structured solution is not employed on a timely basis to ensure participation in the “sweets” that the law still provides.
1 File reference: 1 BvL 21/12