Revision of inheritance tax

The Federal Ministry of Finance BMF has published a “draft of a law to adjust inheritance and gift tax to the jurisdiction of the Federal Constitutional Court”. The draft particularly addresses the distinction between favoured assets and non-favoured assets, the exemption of very small firms from aggregate wage regulations, the introduction of a new needs-related examination for exemptions concerning the acquisition of “large” company assets and the introduction of a “melt-away” model as an option for the acquisition of large corporate assets.

Background: The Federal Constitutional Court BVerfG recently declared that Articles 13a and 13b in connection with the tax rate standard of Article 19 paragraph 1 Inheritance Tax Law ErbStG and therefore the payment of the current inheritance and gift tax, are generally incompatible with the constitution. The current regulations are however still applicable until a revision has been made. The Federal Constitutional Court BVerfG has given the legislator a deadline for revision up to 30.6.2016 (BVerfG, judgement of 17.12.2014 – 1 BvL 21/12; NWB DokID: AAAAE-81469).

New definition of favoured assets

  • The Federal Constitutional Court declared it excessive that exemption comes into effect when up to 50 percent of corporate assets consist of administrative assets. This will make it necessary in future to basically tax assets that are not considered worthy of exemption.
  • As this involves a precise demarcation of the assets considered worthy of exemption, the law provides for a new definition of favoured assets – in a departure from the negative definition of the administrative assets catalogue with its numerous exceptions and counter-exceptions.
  • According to this, assets are considered favoured if their main purpose mainly serves an activity genuinely devoted to agriculture and forestry, commerce or freelance work.
  • In this way, the assets worthy of exemption are accurately separated from the assets not worthy of exemption. This completely removes the basis of improper forms such as the so-called “Cash-GmbH”.
  • The debts remaining after the financial means test are allocated on a proportional basis to favoured and non-favoured assets. As companies need a certain amount of non-favoured assets to strengthen their capital, part of the genuinely non-favoured assets (with a value of 10 percent of the favoured net assets) will be treated like favoured assets.
  • The favoured net assets are calculated on a consolidated basis for multi-level company structures. The opportunities for circumvention using the cascade effect are thus removed.

Aggregate wage regulation:

  • The number of employees in a company triggering exemption from compliance with the aggregate wage regulation is reduced to three employees to limit the exemption from the aggregate wage regulation to a relatively small group of business transfers.
  • For companies with four to ten employees, there is a special need for more flexibility in the aggregate wage regulation, because here there could be consequences that are difficult to calculate when there are changes to the number of employees with regard to compliance with the minimum aggregate wage bill. For this purpose, the minimum aggregate wage bill will be decreased for an aggregate wage bill period of five years to 250 percent or for an aggregate wage bill period of seven years to 500 percent.
  • Any structuring as a result of the aggregate wage bill regulation that involves splitting companies and transfer in several steps is counteracted by aggregation of the number of employees and the wage bills.

New exemption needs assessment: When acquiring large amounts of favoured assets over EUR 20 m. (assessment threshold), an exemption needs assessment will be introduced. Below the threshold, the existing tax exemption still applies. Aggregate wage regulations and retention periods are to be observed. The assessment threshold rises to 40 m. euros when there are certain qualitative characteristics in company agreements or statutes. Above the assessment threshold, an exemption needs assessment will be carried out at the request of the taxpayer:

  • If the acquirer has sufficient other means at his disposal to bear the tax burden applying to the favoured assets, there is no exemption.
  • If 50 percent of the net non-favoured assets transferred and already available is not fully sufficient to pay the tax, there is a need for an exemption. A corresponding amount of tax is waived with the condition that the acquirer complies with the aggregate wage and retention regulations.

Tax relief discount

  • The taxpayer can opt to make an irrevocable application for the granting of a tax relief discount.
  • In a corridor of 20 m. to 110 m. euros of favoured assets, the relief discount melts away by one percentage point per 1.5 m. euros, depending on how much the acquisition of the favoured assets lies over the limit of 20 m. euros.
  • From 110 m. euros of favoured assets, there is a standard relief discount of 25 percent for the standard relief and 40 percent in the case of the optional relief.
  • In the context of the assessment prerogative, the standard assumption also in the case of these acquisitions is that there is an absolute risk assumption of a reduced amount.

Source: Draft bill of Federal Finance Ministry, as at 1.6.2015

Note: The changes are initially only to be applied to acquisitions for which the tax arises after the day of promulgation of the amending law. The elimination of already granted tax exemptions (Article 13c paragraph 3 sentence 3 and 4 Inheritance Tax Act ErbStG and Article 13a paragraph 9 sentence 2 Inheritance Tax Act ErbStG) for earlier acquisitions by the same person within a period of ten years also initially only applies for acquisitions for which the tax arises after the day of promulgation of the amending law.

Draft bill of Federal Ministry of Finance, as at 1.6.2015