Inheritance taxes can be traced back to ancient Egypt and have been around in Germany since 1873. As in other countries, inheritance (or: estate) taxes are subject to constant political debate and changes. Today, German inheritance and gift taxes rates are as high as 50%, but tax-exemptions for the transfer of business assets have been introduced in order to not strangulate family-owned businesses. On 17 December 2014 the German constitutional court held the German Inheritance and Gift Tax Law (Erbschaftsteuergesetz, ErbStG) to be unconstitutional. According to the ruling, the treatment of specific types of assets by the legislator was not in line with the imperative of equal treatment of taxpayers, pursuant to Article 3 of the German constitution. Hence, in order to remain in force, the ErbStG needs to be amended until the end of 30 June 2016. The latest revision (not the first one!) is already under way.
2. GENERAL CONCEPT OF GERMAN INHERITANCE AND GIFT TAX LAW
Broadly, under German inheritance tax laws, German tax residents are subject to inheritance tax on the net value of a heritage. The tax rates and actual tax burden depends on (i) the applicable tax class, (ii) the value of the acquisition (less deductions) and (iii) the nature of the assets.
Close family members (spouses, civil partners, children, grandchildren, as the case may be parents) enjoy the best tax rates in a range from 7% to 30% (“Tax Class I”).
Other family members are subject to a tax rate of 15% to 43% on their acquisition through the inheritance or donation (“Tax Class II”).
Non-related recipients are taxed at a rate of 30% or 50% (“Tax Class III”).
Tax free amounts and specific exemptions are available.
Individualy that have moved to Germany (and whose center of interests has shifted to Germany) should be aware that Germany (i) treats you as tax resident irrespective of your nationality and (ii) applies the world-income principle on taxable events such as successions or donations. For example, if a German resident (US citizen and no German citizen) transfers US (or Canadian or Swiss etc.) assets and properties to his son (living in the US) this will be a taxable event from a German Inheritance Tax Law perspective. Double taxation issues would need to be resolved (or at least mitigated) by applying international tax treaties.
3. TAX-EXEMPTIONS FOR TRANSFER OF BUSINESS ASSETS – TOO GENEROUS!
The general tax concepts described above will continue to apply in the future.
However, the generous tax-exemption for the transfer of business assets – as introduced in the 1990es and extended in 2009 in order to protect family-owned businesses – will not: The German constitutional court held these exemptions to be too generous and has requested stricter limitations. In the past, some taxpayers had “declared” cash and other liquid assets to be business assets in order to minimize inheritance tax. Further, the tax-exemption in principle was linked to maintaining workforce, but only for companies with more than 20 employees. Some companies had subsequently been split up to slip under that threshold.
The new rules – as proposed by the federal government following discussions with the single Länder – will be stricter. In the future, businesses with more than 3 employees will need to comply with the “personnel expenses test” (a substantial portion of the workforce needs to be maintained for five years in order to qualify for a full tax-exemption). Further, it will be more difficult to requalify liquid assets into genuine (qualifying) business assets.
Finally, if an acquirer receives business assets worth more than EUR 26 million, the person must document that it is actually incapable of paying the inheritance tax from his free funds (including those received in the course of the taxable event). Only if that is the case, he may qualify for the full tax-exemption.
As of 1 July 2016 at the latest, German inheritance tax rules will be amended. The most significant change will likely affect the transfer of large businesses: The acquirer must document that he is incapable of paying inheritance taxes in order to benefit from a tax-exemption. Affected family-owned businesses in Germany have already started tax-planning considerations.
For others, including expats in Germany and in cross-border scenarios, the broad scope of application of German inheritance and gift tax laws needs to be considered.