Background
After the Bundesverfassungsgericht (BVerfG) declared the Inheritance Tax Act unconstitutional, a reform had to be enacted. Now, albeit belatedly, all necessary approvals are in place. The final one was given by the Bundesrat on 14 October 2016. Nevertheless, it remains to be seen whether a legal challenge will also be filed against the new law.
Many observers also criticise the new law for still anchoring overly generous benefits for businesses. For this reason, further lawsuits are generally to be expected.
What exactly has been changed?
In principle, business assets are to continue to be favoured. This means that 85% or 100% will continue to be exempt from inheritance and gift tax. As before, the exemption requires that the transferred business be continued essentially unchanged for five or seven years respectively and that the payroll total likewise remain unchanged. With regard to payroll totals, tightening measures have been introduced that primarily affect small and medium-sized enterprises: the payroll requirements must now be met in businesses with more than five employees; previously, the threshold was twenty.
Going forward, the following will therefore apply with regard to the payroll rules:
Exemption of 85 per cent of business assets (claiming the 100 per cent exemption under §13a Abs. 10 ErbStG, new version).
Number of employees in the company and required payroll totals:
– 0 to 5 employees: none
– 6 to 10 employees: 250% within five years (500% within seven years)
– 11 to 15 employees: 300% within five years (565% within seven years)
– more than 15 employees: 400 per cent within five years (700% within seven years)
When determining the payroll totals (both current and subsequent), the wages and salaries of the following persons are not to be included:
- Employees on maternity leave
- Apprentices
- Employees receiving sick pay (long-term sick)
- Employees receiving parental allowance
- Seasonal workers, i.e. those who do not work exclusively or predominantly in the business.
When determining the number of employees in the business, these persons are likewise not to be taken into account, even if they are attributable to the business.
Note: Marginally employed workers (geringfügig Beschäftigte) must be taken into account both when determining the number of employees in the business and when determining the payroll total. The remuneration to be included in the payroll totals comprises employees' gross salaries, all cash and benefits in kind (including benefits in kind arising from the provision of a company car), and also social security contributions and taxes payable on a flat-rate basis by the employer.
Going forward, the extent of administrative assets (Verwaltungsvermögen) will also continue to be decisive; however, under the new rules this is now subject to different conditions:
From now on, a distinction is drawn between "favoured" and "non-favoured" assets. Only "favoured" assets are to be covered by the tax exemptions. Favoured assets are those that primarily, in accordance with their main purpose, serve a commercial, professional, or agricultural and forestry activity.
Previously, the tax relief was forfeited entirely if the transferred business assets consisted of more than 50% administrative assets. Otherwise, the tax exemption was granted in full, which was deemed unconstitutional. With regard to administrative assets, a 10% threshold has now been introduced, which is generally regarded as harmless.
In addition, a so-called "investment clause" has been introduced, under which relief applies to administrative assets if they are invested in assets that do not count as administrative assets.
Caution regarding financial assets: These include, for example, bank account balances and supplier credits. Only if, after deduction of debts, 20% of the operating assets is not exceeded do these financial assets count as favoured assets. Anything beyond this is allocated proportionally to either "favoured" or "non-favoured" assets.
For companies with a value of between EUR 26 million and EUR 90 million, further tightening measures apply, namely that the exemption rate of 85% or 100% is gradually reduced until it ceases entirely for companies with a value of around EUR 90 million. However, upon application, there is an entitlement to deferral of inheritance or gift tax for seven years. Interest is to be charged only from the second year of deferral.
If the inheritance or gift tax cannot be paid out of available income, there is also the possibility of tax remission. Available income consists of 50% of private assets and 50% of the other assets received by the acquirer in addition to the business assets. This provision was included because the BVerfG had expressly directed that large companies should be exempted from inheritance tax only where this is necessary for the preservation of the business.
Conclusion
The new rules have been adopted and have received approval from all the required bodies. This finally provides clarity. Whether further lawsuits will be filed with the BVerfG, however, remains to be seen.
Frequently asked questions
Frequently asked questions
What is the level of relief for business assets under inheritance tax?
Even after the reform, business assets can be exempted from inheritance and gift tax at 85% (standard relief) or 100% (optional relief under section 13a (10) ErbStG, new version). The prerequisites are that the business is continued for five or seven years, respectively, and that the payroll requirement is met.
From how many employees does the payroll rule apply under the inheritance tax reform?
The payroll rule already applies to companies with more than five employees; previously, the threshold was twenty employees. For 6 to 10 employees, 250% of the initial payroll must be reached within five years (or 500% within seven years); for 11 to 15 employees, 300% (565%); and for more than 15 employees, 400% (700%).
Which employees are not included in the payroll total?
Excluded are employees on maternity leave, apprentices, long-term sick employees receiving sick pay, employees receiving parental allowance, and seasonal workers. These individuals are also not counted when determining the number of employees. Marginally employed workers, by contrast, count both toward the employee headcount and the payroll total.
How is administrative assets (Verwaltungsvermögen) treated under the reformed inheritance tax rules?
A distinction is made between privileged and non-privileged assets, with only the privileged portion qualifying for tax exemptions. A 10% flat allowance applies to Verwaltungsvermögen and is deemed non-detrimental. Financial assets such as bank balances, net of debts, qualify as privileged assets only up to 20% of the business assets.
What special rules apply to businesses valued at €26 million or more?
From a business value of €26 million, the relief rate of 85% or 100% is gradually reduced and ceases entirely at around €90 million. Upon application, the tax may be deferred for up to seven years, with interest accruing only from the second year of deferral. In addition, the tax may be waived if it cannot be paid from available income (50% of private assets plus 50% of other assets received).