On 08 September 2016, the Mediation Committee will deliberate on the legislative resolution of the German Bundestag (BR-Drs. 344/16) and the points of criticism raised by the committees of the Bundesrat (BR-Drs. 344/1/16) concerning the act implementing the requirements of the judgment of the Bundesverfassungsgericht of 17 December 2014 (1 BvL 21/12) on business asset relief under the Inheritance Tax Act.
In its submission to the Mediation Committee, the IDW takes a critical position on a number of selected points. These include the retention of the relief for interests in commercially characterised partnerships as well as for corporations by analogy, the risk of a revival of the "Cash-GmbH" — which in the IDW's view does not exist — and the changes to the simplified capitalised earnings method aimed at eliminating overvaluation. In addition, the IDW advocates that the new provisions of the ErbStG should not apply retroactively as of 01 July 2016, but should instead take effect for the future.
The IDW's letter is available here: IDW issues comments on inheritance tax
The IDW's principal points of criticism are as follows:
– The granting of the optional relief should not be tied to the requirement of a maximum of 10% administrative assets.
– For commercially characterised partnerships (and analogously for corporations), the reliefs should be retained.
– The asset components to be excluded from administrative assets should be capped at the actual stock of pension obligations existing at the time of transfer, valued in accordance with commercial law principles.
– The criticism by the committees of the Bundesrat of the financial assets test (including the harmless threshold of 15%, the preliminary test of the 90% threshold for harmful administrative assets, and the 10% threshold for harmless administrative assets) is unfounded, as these provisions do not lead to a revival of the so-called "Cash-GmbH".
– The capitalisation factor of the simplified capitalised earnings method must be significantly reduced in order to eliminate what the IDW describes as the "unrealistic" overvaluation of business assets. In the IDW's view, the excessive capitalisation factor leads to inaccurate results.
– The new provisions of the Inheritance Tax Act should apply with effect for the future, not retroactively as of 01 July 2016. If this is not feasible, at least an application-based option between old and new law should be provided for the period from 01 July 2016 until the promulgation of the new law.
Source: IDW-online
Frequently asked questions
Frequently asked questions
What position does the IDW take on the option exemption regarding administrative assets?
The IDW opposes linking the option exemption to a maximum threshold of 10% administrative assets. It argues that such a rigid limit is not appropriate and should therefore not be part of the new statutory rules.
How does the IDW assess the risk of a revival of the so-called Cash-GmbH?
In the view of the IDW, there is no risk of reviving the Cash-GmbH through the financial assets test. Neither the 15% safe-harbor threshold, the upfront review of the 90% threshold for harmful administrative assets, nor the 10% threshold for non-harmful administrative assets would produce such an effect. The criticism voiced by the Bundesrat committees is therefore unfounded.
Why does the IDW criticize the capitalization factor of the simplified capitalized earnings method?
According to the IDW, the current capitalization factor leads to an unrealistic overvaluation of business assets and therefore to inaccurate results. The IDW is consequently calling for a significant reduction of the factor to ensure an appropriate valuation.
What does the IDW demand regarding the temporal scope of application of the new inheritance tax rules?
The IDW rejects a retroactive application of the new rules as of 1 July 2016 and advocates for prospective application only. If this cannot be implemented, taxpayers should at least be granted an option to choose between the old and new law for the period from 1 July 2016 until the promulgation of the new legislation.
How should pension obligations be treated within administrative assets according to the IDW?
The IDW requires that the assets to be excluded from administrative assets be capped at the actual amount of pension obligations existing at the time of transfer. Valuation should follow commercial law principles in order to reflect the real level of obligations.