Germany's constitutional court confirmed on December 17, 2014, that it was legitimate to shield company assets from inheritance taxes to safeguard jobs. The special importance of family-run firms in Germany has now been recognized from the country's highest court. Such companies are fundamentally worth protecting and supporting. It is exactly this sort of tax relief that allowed family firms to keep their employees and enterprises together during times of economic crisis. It has also helped Germany create record levels of jobs and tax revenues.
Yet, there are aspects of Germany’s inheritance tax code that need to be improved. Three points, in particular, concerned the constitutional court. Firstly, tax relief based on administrative assets of up to 50 percent is disproportionate. Family-run businesses have long opposed abuse by so-called cash companies, and the government has already tightened loopholes in the past. If the court sees need for improvement, we support that. Freeloaders, in our opinion, deserve to be shut out to ensure that exemptions from inheritance taxes are constitutional.
Should these family businesses be weakened, there are plenty of private equity funds from the United Arab Emirates or developing nations just waiting to snap them up
At the same time, lawmakers must not throw out the baby with the bath water. Not all administrative assets are detrimental. They can also contribute to the stability of a company.
Secondly, the court ruled small firms would not have an automatic exemption from the rules. In the future, those with fewer than 20 employees will have to prove that they are safeguarding jobs, as others do. This point is fundamentally understandable because until now small firms essentially had no criteria to fulfill.
Family-run businesses don’t want free handouts. They want to contribute to society when given an exemption from inheritance taxes. Yet proving need can be hard for small firms, which are particularly susceptible to the turns of the economy or technological changes. The smaller the company, the harder it is to guarantee wages over a longer period of time.
The third point for the court was that larger firms in the future should be subject to an “individual need assessment.” For large family firms, the connection between jobs and the tax exemption will only be allowed in specific cases. How this assessment will be carried out and how big companies need to be to fall under it is still totally unclear. The constitutional court has given lawmakers plenty of leeway. Politicians must now carefully avoid penalizing companies with high amounts of capital for having solid balance sheets.
These companies are Germany’s hidden champions and make up the backbone of the country’s economy. With their quality products, they ensure Germany’s export prowess and prosperity. Should these family businesses be weakened, they could be at risk. Numerous private equity funds in the United Arab Emirates and other developing nations are waiting to snap them up. Their loss would destroy Germany's unique economic structure, based on a culture of strong equity capital that has been an anchor during times of crisis.
Against this backdrop, the court’s ruling sets not only a precedent for inheritance taxes, but also for the German economy. Implementing the ruling is therefore not simply about tax policy, tax revenues or questions of redistribution; above all, it is about who will own, finance and lead Germany's family firms in the future.
Lutz Goebel is the chairman of Die Familienunternehmer, a lobby group for family-run businesses in Germany. To contact the author: [email protected]