Inheritance tax reform

Following the German Federal Constitutional Court's ruling in its judgement handed down on 17 December 2014 that some of the provisions relating to the preferential inheritance tax treatment of business assets are unconstitutional, the Federal Ministry of Finance presented an initial draft bill on 2 June 2015 intended to create constitutional provisions for business assets. Contrary to an earlier announcement by the Minister of Finance, Dr Schäuble, that the changes would be “minimally invasive”, the changes are in fact considerable, in particular for those who wish to transfer stakes in companies with a value in excess of EUR 20 million.

Basic concept retained

Whilst the draft bill essentially retains the current preferential treatment concept which involves the granting of basic relief of 85% (regular relief) or 100% (optional relief) and a maximum deductible amount of EUR 150,000.00, the other changes in the draft bill are considerable.

Changes for all companies

Numerous changes relate to the eligibility requirements for preferential inheritance tax treatment. The “all-or-nothing principle” applied for the granting of relief is, for example, being abolished and replaced by an apportionment principle. Preferential inheritance tax treatment will therefore only continue to apply for eligible business assets, whilst inheritance tax will have to be paid in full without any relief on business assets which are not eligible.

The administrative assets test is also being abolished and is being replaced by a system which essentially makes the classification of business assets as being eligible for preferential inheritance tax treatment dependent on whether a business asset serves an inherent commercial or freelance activity.

Changes for large companies

As expected, the key changes affect the acquirers of stakes in large companies. According to the Federal Constitutional Court, these should no longer be eligible for preferential inheritance tax treatment without a needs test. This is why the draft bill provides that preferential inheritance tax treatment will in principle still only be granted if the value of the preferentially treated business assets transferred to an acquirer does not exceed EUR 20 million. This threshold was therefore formulated in relation to acquirers, as was already intended in the white paper of the Federal Ministry of Finance published in February of this year.

The threshold increases to EUR 40 million if the articles of association or partnership agreement contain(s) certain withdrawal, compensation and disposal restrictions. These must, however, be in place ten years before and 30 years after the transfer date.

The review of the threshold of EUR 20 million also applies to all acquisitions which originate from the same person within ten years. If several of these acquisitions within ten years exceed the threshold of EUR 20 million, not only the granting of the preferential inheritance tax treatment of the last acquisition (with which the EUR 20 million threshold is exceeded) is refused, but also that of the prior gifts with retroactive effect. The only preferential treatment which is available for the overall transfers is that which is intended for acquisitions over EUR 40 million.

Future preferential treatment for large companies with option right

If the threshold of EUR 20 million is exceeded, the acquirer of such assets has the option with respect to preferential inheritance tax treatment of using decreasing basic relief (Section 13c of the draft German Inheritance Tax Act) or a tax exemption if the acquirer passes an appropriate means test (Section 28a of the draft German Inheritance Tax Act).

In both cases, the minimum sums of wages and salaries and withholding regulations have to be observed, as otherwise the preferential treatment granted at the time of transfer is reduced accordingly.

First alternative: Decreasing basic relief without any assessment of relief needs

If basic relief is opted for, basic relief (i.e. regular or optional relief) can also be claimed for the acquisition of a stake in a large company. This reduces, however, by one percentage point for each EUR 1.5 million by which the value of the preferentially treated assets exceeds the amount of EUR 20 million. Depending on which relief option is chosen, the relief available to the acquirer of a large company without any assessment of needs is either a minimum deduction of 25% (basic relief) or 40% (optional relief).

Second alternative: Tax exemption after review of relief needs

Alternatively, acquirers can request an exemption from inheritance tax instead of basic relief. The acquirer has to evidence, however, that he is not personally able to pay this tax from his available assets. Available assets mean 50% of the aggregate of (i) the assets transferred simultaneously with the inheritance or gift and (ii) the assets of the acquirer which existed at the time of transfer. Preferentially treated business assets are not counted as available assets in either case.

Since the tax assessed without the application of the basic relief deductions is only exempted to the extent that it cannot be settled with available income, this actually only constitutes a partial exemption.

Changes for microenterprises

A much higher number of smaller enterprises are also to fall under the sum of wages and salaries regulation in future. So far, enterprises with fewer than 20 employees have not had to observe this.
In future, the sum of wages and salaries requirement will have to be met by all enterprises with more than three employees. Enterprises with between four and ten employees, however, will benefit from a lower minimum sum of wages and salaries. Here, the minimum sum of wages and salaries required for relief of 85% is reduced from 400% to 250%. If, on the other hand, optional relief is applied for, the minimum sum of wages and salaries required for the 100% exemption increases to 500%.