The transfer of business assets may be exempt from gift tax and inheritance tax under certain conditions. However, this preferential treatment does not apply to certain assets that are considered administrative assets. This also includes land that is transferred to third parties for use, as regulated in Section 13b (4) ErbStG. The Federal Fiscal Court (BFH) has clarified in a judgement that commercial activities such as car park operations or hotels are to be classified as administrative assets for income tax purposes - partly contrary to the previous practice of the tax authorities. What does this mean for succession planning? We shed light on the facts, the ruling and its implications.

Principle: Administrative assets in the context of gift and inheritance tax

According to Section 13b (4) ErbStG, administrative assets are excluded from the tax concessions for gift tax and inheritance tax. This includes, in particular, the transfer of property to third parties that does not serve the actual purpose of the business. While business assets such as machinery or production facilities can be favoured, administrative assets - such as property that is rented or leased out - are subject to a different tax assessment. In its ruling of 28 February 2024, the BFH clarified the definition of these administrative assets and thus tightened the limits of tax relief.

The facts: A concrete example

A taxpayer inherited a sole proprietorship from his father as his sole heir. This business comprised a property on which a multi-storey car park and a petrol station were operated. In his declaration to determine the value of the business assets for inheritance tax purposes, the heir did not declare any administrative assets. He assumed that the car park business was to be regarded as a commercial activity and would therefore be tax-privileged. The tax office took a different view and classified the entire value of the property with the car park and petrol station as administrative assets. As a result, the matter was clarified in court by the BFH.

BFH decision: Car parks and hotels as administrative assets

In its ruling of 28 February 2024 (II R 27/21), the BFH ruled in favour of the tax office. The property developed with the multi-storey car park and petrol station was classified as a tax-damaging administrative asset pursuant to Section 13b (4) no. 1 sentence 1 ErbStG. The car park operation indisputably transfers parts of the property to third parties for use, which meets the criteria of administrative assets. The BFH clarified that it is not relevant for gift tax and inheritance tax purposes whether additional commercial services such as entry and exit controls or payment services are provided. Even if the short-term provision of car parking spaces is considered commercial under income tax law, this has no significance under inheritance tax law.

The BFH went even further and included accommodation businesses such as hotels, guesthouses or campsites in this assessment. These are also administrative assets, although the activity is to be categorised as originally commercial under income tax law. The Second Senate justified this by stating that the favourable tax treatment is only intended for active business assets and not for the mere transfer of use of real estate. The BFH did not see any unconstitutional unequal treatment compared to other favoured property transfers, such as housing companies.

Different view of the tax authorities

The tax authorities take a different position in the inheritance tax guidelines (R E 13b.13 p. 3 ErbStR). According to this view, the transfer of real estate does not lead to administrative assets if uniform commercial services are also offered and the activity is considered commercial under income tax law. This applies to hotels or campsites, for example, where services such as cleaning or catering are provided in addition to the use of the premises. However, as of 29 July 2024, the tax authorities have not adapted their guidelines to the BFH ruling. It remains to be seen whether and when the inheritance tax guidelines will be amended to implement the case law.

Practical implications and legal uncertainty

The BFH's decision has far-reaching consequences for gift tax and inheritance tax. In future, companies with car parks, hotels or similar businesses must expect their property to be classified as administrative assets and therefore not benefit from tax relief. This increases the tax burden when transferring assets, for example as part of succession planning. The differing opinion of the tax authorities also creates legal uncertainty, as taxpayers are caught between the positions of the BFH and the tax office. As long as the guidelines have not been amended, tax offices are at least still bound by the favourable administrative opinion.

An example: A family business is planning to transfer a hotel to the next generation as a gift. According to previous administrative practice, this would be tax-favoured, but the BFH ruling means that the hotel is subject to gift tax as an administrative asset. Those affected should take such developments into account at an early stage and not wait for a legal clarification.

Conclusion and recommendation for action

The BFH ruling of 28 February 2024 tightens the boundaries between tax-privileged business assets and tax-damaging administrative assets. This poses a new challenge for gift tax and inheritance tax, especially for businesses such as hotels or car parks. As of 29 July 2024, the discrepancy with administrative practice remains, which makes succession planning more difficult. Taxpayers should review their asset structures and, if necessary, adjust them in good time in order to avoid tax disadvantages.

Update response from the tax authorities (19 November 2024)

The tax authorities have responded with a partial non-application decree (identical decree dated 19 November 2024) and clarified that hotel operations should continue to not constitute administrative assets, but car parks are to be classified as harmful administrative assets. The treatment of customer and employee car parks has still not been conclusively clarified.

If car parks are to be transferred in practice, there should be no administrative assets in the event of a business transfer during a temporary closure.

Yours TAXGATE team supports wealthy individuals and medium-sized companies in implementing tax-efficient asset transfers to the next generation. Contact our experts Stephan Scheffoldif you have questions about administrative assets, gift tax or inheritance tax!

Status: July 2024 - Subject to change during the legislative process.