Costly Inheritance Death and Taxes for Family Firms

Family-owned firms, which form the backbone of Germany’s economy, will see their tax bills rise after Germany’s top court ruled that certain inheritance tax privileges are unconstitutional.
Some day this will be yours, minus the taxes.

In a long-awaited ruling, Germany’s top court Wednesday struck down a law that spared the country's many family-owned companies from a controversial inheritance tax.

The ruling, in the eyes of critics, could threaten the very existence of some family-owned businesses, which are extremely common in Germany and form the backbone of its export-focused economy.

A law stemming from 2009 had allowed family-owned businesses to pay less or no inheritance tax at all when a company is handed down. An individual in Germany has to pay up to 50 percent when they inherit property or other assets.

Germany's Federal Constitutional Court found that tax exemptions for family-run businesses violated the principle of equal treatment, because individual citizens could not benefit from the tax advantage.

If the exemption regulation for businesses would be ruled unconstitutional today, then the future viability of family businesses would be in danger. Brun-Hagen Hennerkes, Chief executive of the German foundation of family businesses

More than 90 percent of the over 3 million firms in Germany are family-owned, ranging from giants such as auto parts and tools maker Bosch and publishing group Bertelsmann to one-man businesses such as the local bakery and hair dresser.

“If the exemption regulation for businesses would be ruled unconstitutional today, then the future viability of family businesses would be in danger,” Brun-Hagen Hennerkes, chief executive of the German foundation of family businesses, said before the ruling was announced.

“It would reduce the equity ratio of the companies, it would add a negative effect on liquidity, and would complicate the succession,” Mr. Hennerkes told Handelsblatt Global Edition.

The court’s vice president, Ferdinand Kirchhof, said the current exemption scheme was too large in scope and size, allowing firms tax breaks of almost €40 billion ($50 billion) in 2012, compared with only €4.3 billion in inheritance collected by the government, news agency Reuters cited Mr. Kirchhof as saying.

For some small firms in Germany, the inheritance tax exemption was legitimate, but for larger companies it was not, the court said.

“Privileges on corporate assets are disproportional when it does not concern small and medium-sized businesses and without requiring a test,” the court said in a statement.

It ordered the German government and parliament to come up with a new corporate inheritance tax law by June 30, 2016 at the latest to correct the current one. The existing rules would stay in place until a new law has come into force, the court said.

The constitutional court came to examine the tax exemptions after an individual complained about having to pay a 30 percent inheritance tax. He brought the case before Germany’s top tax court, the Bundesfinanzhof, which in turn asked for a ruling from the constitutional court.

Mr. Hennerkes of the German foundation of family businesses as well as other experts said they expected the German government to keep protecting the interests of businesses.

“Chancellor Angela Merkel as well as [economics minister] Sigmar Gabriel have both said that they will embark on any possible way to keep the order of succession tax-free,” Mr. Hennerkes said.

 

Franziska Scheven and Gilbert Kreijger are editors with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the authors:  [email protected] and [email protected]