On 20 June 2016, the CDU, CSU and SPD finally reached an agreement on revising the inheritance and gift tax reform. A vote in the Bundesrat is scheduled for 8 July 2016; how the Greens will vote remains to be seen.
Background:
On 17 December 2014, the Federal Constitutional Court ruled that the provisions on inheritance tax relief for business assets were partially unconstitutional. The reasoning was that certain rules on the exemption of business assets were incompatible with Article 3 (1) of the German Basic Law. In response, the Federal Ministry of Finance (BMF) presented an initial draft bill for the reform of the inheritance tax on 2 June 2015, intended to establish provisions that are constitutionally sound. Compared with the 2015 government draft, the overall agreement provides for the following adjustments:
1. Less bureaucracy for small businesses
For companies with up to five employees, the payroll review for granting the exemption from inheritance and gift tax will continue to be waived. Seasonal workers are not taken into account when determining the number of employees.
2. Abusive tax structuring will be restricted
If the non-favoured administrative assets exceed 90% of total business assets, the exemption from inheritance and gift tax is excluded. The Federal Constitutional Court had explicitly required that abusive tax structuring be restricted.
3. Tax relief for investments
In future, investments in the business that are made within two years of the testator's death in accordance with their previously expressed intent are to receive tax-favoured treatment. The rationale is that inheritance tax should not impede investment in the business or jeopardise jobs.
4. Administrative assets generally not favoured
In future, administrative assets will generally not be tax-favoured. However, up to 10% will be treated as tax-favoured business assets. In addition, the following will be favoured: third-country shareholdings in holding companies, pension obligations, and leased land made available for the purpose of marketing the company's own products (examples: petrol stations, breweries leasing premises to pubs, etc.). Financial assets may be counted as part of the tax-favoured business — up to 15% — to secure the necessary liquidity of a company.
5. Family businesses receive tax relief
The fair market value of a family business — given the usual restrictions on the transfer of shares — generally does not correspond to the value the heir could actually realise on a sale. Therefore, such transfer restrictions will be taken into account when determining the value of the business at the time of share transfer, in the form of a tax exemption of up to 30%. Note: The transfer restrictions must be in place for two years before and 20 years after the testator's death or the date of the gift.
6. Restrictions on the exemption of large business assets
In future, from a favoured business asset value of EUR 26 million per acquirer, either an individual exemption needs assessment will be carried out or an exemption deduction model will be applied. The exemption deduction is reduced by one percent for every EUR 750,000 by which the acquisition exceeds the EUR 26 million review threshold. From an acquisition of EUR 90 million, no exemption is granted under the optional exemption regime with a seven-year holding period and a payroll of at least 700%. From an acquisition of EUR 89.75 million, no exemption is granted under the standard exemption regime with a five-year holding period and a payroll of at least 400%.
7. Adjustment of the capitalisation factor for realistic asset valuation
Given the persistent low-interest environment, overvaluation of companies is to be avoided. To enable a realistic company valuation, the relevant capitalisation factor used in the simplified earnings value method to determine the value of the business will be reduced from 17.86 to between 10 and a maximum of 12.5 (= the capitalisation factor which, multiplied by the sustainable annual earnings, yields the value of the business).
8. Introduction of a legal entitlement to deferral without preconditions
Provided the payroll rule and the retention periods are observed, a legal entitlement to a deferral without preconditions for up to ten years will be introduced for acquisitions upon death. The deferral is to be interest-free and to apply to the tax attributable to the favoured assets — irrespective of their value. The rationale is that payment of the inheritance tax should not jeopardise the existence of a business.
Conclusion:
The agreement is intended to safeguard the continuity of mid-sized businesses (Mittelstand) and to secure the preservation of existing jobs in Germany. A balanced solution is said to have been found that meets the requirements set by the Federal Constitutional Court. The reform is intended to stand for sustainability, future viability, and long-term business activity in German companies.
Source: Statement by Wolfgang Schäuble (Federal Minister of Finance, CDU), Sigmar Gabriel (Federal Minister for Economic Affairs, SPD) and Horst Seehofer (Minister-President of Bavaria, CSU)
Frequently asked questions
Frequently asked questions
From what number of employees onwards is the payroll test waived for inheritance tax purposes?
For companies with up to five employees, the payroll test (Lohnsummenprüfung) is waived when granting the inheritance and gift tax exemption. Seasonal workers are not included when determining the number of employees. This rule is intended to reduce bureaucracy for small businesses.
When is the inheritance tax exemption denied due to administrative assets?
If non-privileged administrative assets exceed 90% of total business assets, the exemption from inheritance and gift tax is denied entirely. Administrative assets of up to 10%, by contrast, are treated as tax-privileged business assets. In addition, financial means of up to 15% may be allocated to the privileged assets to secure liquidity.
From what business value does the relief needs assessment apply under inheritance tax law?
Starting at EUR 26 million of preferential business assets per acquirer, an individual relief needs assessment (Verschonungsbedarfsprüfung) or a sliding-scale relief model applies. The relief deduction is reduced by one percent for each EUR 750,000 above this threshold. Under the optional relief, the deduction is eliminated entirely at EUR 90 million; under the standard relief, at EUR 89.75 million.
What tax reliefs apply to family businesses with transfer restrictions?
Customary transfer restrictions on shares in family businesses are recognised when determining the enterprise value, granting a tax exemption of up to 30%. The prerequisite is that these restrictions exist for two years before and 20 years after the date of death or gift. This is intended to reflect the discrepancy between the fair market value and the value actually achievable upon sale.
How is the capitalization factor adjusted under the simplified capitalized earnings method?
Due to the prolonged low-interest-rate environment, the capitalization factor is being reduced from the previous 17.86 to a value between 10 and a maximum of 12.5. This aims to prevent overvaluation of companies for inheritance tax purposes. The factor is multiplied by the sustainable annual earnings to determine the enterprise value.
Is there a legal right to defer inheritance tax in cases of business succession?
For acquisitions due to death, a legal right to an unconditional, interest-free deferral of up to ten years is being introduced. The prerequisite is compliance with the payroll rule and the retention periods. The deferral applies to the tax attributable to the privileged assets and is intended to safeguard the existence of businesses.