Inheritance tax reform – Bundesrat demands additional tightening of regulations

1. Background

On 8 July 2015, the Federal Government adopted the draft inheritance tax reform bill and submitted it to the legislative procedure. The statement of the upper house of the German parliament, the Bundesrat, on the planned legislative changes has now been available since 25 September 2015 (Bundesrat document 3.53/13 Decision). It is now the Federal Government’s turn again to respond to the proposals of the Bundesrat. The statement is expected on 7 October 2015.

2. Significant negative alterations compared to the Federal Government’s draft

Anyone who thought that the Bundesrat would still propose significant improvements to the draft bill, will be disappointed by its statement. The improvements discussed in the Bundesrat prior to the statement did not receive any majority backing.

Question of definition non-eligible assets still unanswered

The biggest discrepancy between the Federal Government and the Bundesrat is currently with respect to eligible assets. While the Federal Government favours the “primary purpose principle” for determining eligible assets, the Bundesrat in principle wants to retain the current administrative assets catalogue subject to minor changes. The Bundesrat expressly rejects the “primary purpose principle” for a number of reasons, not least due to the difficulties associated with its practical implementation and the risk of new tax structuring considerations. If agreement cannot be reached on this issue, the legislative procedure could well drag on for a long time. The Federal Government’s reaction on this issue, which is expected soon, could give an indication as to whether the legislative procedure will in fact, as planned, be completed before the end of this year.

Optional relief only to be granted for a maximum of 10 per cent of administrative assets

The Federal Government and the Bundesrat also disagree on the application of basic relief of 100 per cent. While the Federal Government wants to permit the application for optional relief without any further requirements (in this case the taxpayer will in future only have to comply with longer wage bill sum and retention periods and stricter wage bill sum requirements), the Bundesrat only wants to grant the optional relief if the 10 per cent administrative assets threshold is not exceeded on the transfer date. Buyers of company shares with an administrative assets threshold of 30 per cent, for example, will in future have to pay tax on 40.5 per cent of the value of the company. This value is made up of 30 per cent of the non-eligible assets and 15 per cent of the remaining eligible assets (15 per cent of 70 per cent equals 10.5 per cent) because optional relief on the remaining eligible assets shares is ruled out due to the fact that the administrative asset threshold of 10 per cent has been exceeded.

Inheritance tax breaks for large companies being tightened

A considerable tightening of inheritance tax breaks for large companies would come into force if the Bundesrat is successful in asserting its proposals.

The statement of the Bundesrat does not mention any relief with respect to the increased threshold of EUR 52 million. It had previously been discussed that relief was to be provided if the articles of association as a requirement for the increased threshold contain certain withdrawal, compensation and disposal restrictions. These provisions must, however, be in place ten years before and thirty years after the transfer date. They are not, however, practicable in reality. At least a reduction of the forty-year period was discussed. This opinion did not receive the required backing in the Bundesrat.

The Bundesrat is also proposing considerable negative changes with respect to decreasing relief.

Firstly, the decreasing relief brackets in which relief to be applied decreases are to be reduced considerably compared to the Federal Government’s draft bill. While the Federal Government’s draft bill still provides for a decreasing relief bracket of EUR 26-116 million or EUR 52-146 if the increased threshold is applied, the Bundesrat only advocates a decreasing relief bracket of EUR 26-34 million or EUR 52-60 million if the increased threshold is applied. The range of the decreasing relief bracket of EUR 90 million in the Federal Government’s draft bill would therefore be reduced to only EUR 8 million.

Secondly, the Bundesrat wants, if the decreasing relief bracket is exceeded, to abolish the minimum decreasing relief of currently 35 per cent if optional relief if opted for and of 20 per cent if regular relief is opted for. If this concept is adopted, decreasing relief will no longer be granted if the decreasing relief bracket is exceeded.

No change proposals with respect to company valuation

It is a well-known fact that due to the current low interest rates the German Valuation Act (Bewertungsgesetz) in its current form leads to company valuations which are much too high. An amendment of the Valuation Act had therefore previously been discussed. This discussion has not, however, been included in the statement of the Bundesrat. It is now up to the Bundestag (lower house of parliament) to address this issue.

3. Conclusion

All in all, these proposals of the Bundesrat do not bode well. The hope of additional relief being introduced during the legislative procedure is therefore dwindling further.

In view of this situation, every family business owner must check whether it would not be more advantageous to transfer their company under the current legislation. If this option is considered, however, the necessary preparatory measures must now be initiated in order to remain capable of action at all times.