After tough negotiations, the Mediation Committee today adopted its recommendation for the reform of the Inheritance and Gift Tax Act (ErbStG) (BT-Drs. 18/9690). If the Bundestag and Bundesrat approve this bill, the law will come into force retroactively from 1 July 2016.
The reform was necessary because the Federal Constitutional Court had declared the existing exemption regulations for business assets in Sections 13a and 13b ErbStG in conjunction with the tax rate standard (Section 19 ErbStG) to be unconstitutional (Judgement of 17.12.2014 - 1 BvL 21/12). The legislator failed to meet the deadline set by the Federal Constitutional Court to pass a new law by 30 June 2016. The Mediation Committee has only now been able to reach an agreement within the coalition and with the federal states, which must approve the law in the Bundesrat.
What remains?
- Structure of preferential treatment for business assets: The legislator only changes the details that make the law unconstitutional.
- Exemption discount of 85% (standard exemption) or 100% (full exemption) for business assets: Complete exemption from inheritance and gift tax is possible.
- Linking the exemption to the wage bill (preservation of jobs), continuation of the company for five or seven years and a maximum quota for unproductive assets (so-called administrative asset quota).
What's next?
- Large business assets over € 26 million (large acquisitions): The full exemption only applies to the acquisition of business assets of up to € 26 million. The exemption is reduced between € 26 million and € 90 million (melting model). From € 90 million, business assets are also fully taxable. Alternatively, the acquirer can use the so-called Remission model if they do not have sufficient private assets to pay the inheritance tax on a major acquisition. Partial or even full remission of the tax is possible upon application. The remission model is also available for the acquisition of business assets worth more than €90 million. It is attractive for anticipated succession if the children (who are often still minors) have not yet built up any private assets.
- Easing of the wage bill for small companies: Companies with more than five and less than ten employees or with more than ten but less than 15 employees must achieve a lower minimum wage total than companies with 15 or more employees.
- Administrative asset ratio: The ratio of administrative assets to total business assets may not exceed 20% in the case of full exemption.
- Definition of administrative assets:
- Restriction for pension obligations: Assets that are used exclusively and permanently to fulfil pension obligations are not administrative assets.
- Art collections, stamp collections, vintage cars, sailing yachts and similar items that are typically used for private living are now expressly categorised as administrative assets - unless trading in these items is the main purpose of the company.
- Leased properties are not administrative assets if they are primarily provided to serve the sale of the company's own products and goods within the framework of supply contracts (e.g. warehouses operated by third parties, logistics).
- Financial resources: Every company is dependent on a certain amount of liquid funds and has current receivables. Therefore, financial resources to the value of 15% of total business assets do not count as harmful administrative assets. The ratio of cash and cash equivalents is calculated as follows: (cash + business assets + cash receivables + other receivables - debts)/value of business assets ≤ 15%.
- Room for manoeuvre by converting administrative assets into productive assets (only in the event of inheritance): The testator had planned an investment but was unable to realise it before his death. The acquirer now has two years to realise this investment. The harmful administrative assets used for this purpose (e.g. cash) are then retroactively reclassified as productive assets.
- Advance discount in the case of restrictive articles of association or articles of association: The legislator is primarily targeting family businesses that are to remain in family hands in the long term and only distribute part of their profits to the shareholders. A discount of up to 30% on the company value is possible if the partnership agreement or articles of association provide for special restrictions on the withdrawal or distribution of profits and the transfer of the shareholding and the shareholders receive a settlement on leaving the company that is below the market value of their shareholding. The discount becomes relevant if the acquirers only claim the standard exemption of 85% and/or have to pay additional tax on the acquisition due to a breach of the preferential provisions.
- Valuation using the simplified capitalised earnings value method: The capitalisation factor is set at 13.75. Enterprise value = sustainably realisable annual income x 13.75.
- Deferral of inheritance tax: The deferral is only granted for a maximum of seven years and is only interest-free in the first year. The interest rate in subsequent years is 6% p.a.
