The document summarizes Germany's amended Inheritance and Gift Tax Act. Key changes include new rules for tax exemptions on business assets, including requirements that companies have a minimum number of employees and sum of salaries. Tax exemptions are now available at 85% or 100% depending on holding periods. Large inheritances or gifts over 26 million euros face higher taxes with exemptions reduced incrementally. Planning is needed for transferring both business and private assets.
Strategic Resources May 2024 Corporate Presentation
German inheritance tax act reform 2016 overview
1. Germany: Tax exemptions for
business assets under the amen-
ded Inheritance and Gift Tax Act
March 2017
2. Seite 2
AGENDA
► The new rules on tax exemptions for business assets – Overview
► All you need to know – Highlights
► Summary and Outlook
The amended Inheritance and Gift Tax Act
3. Page 3
The new rules on tax exemptions for
business assets – Overview
Sum of salaries requirement
► Applies to companies with more than 5
employees
► Different brackets for minimum sum of salaries
(> 5 to ≤ 10, > 10 to ≤ 15, > 15 employees)
Sum of salaries term/holding requirement
► 5 years in case of regular relief (85%)
► 7 years in case of optional relief (100%)
Non-operating assets
► Several amendments (definition of non-
operating assets, items serving private
lifestyle)
► Reinvestment clause (in the case of an
acquisition by way of death)
► non-harmful non-operating assets = 10% of
operating assets
► consolidated financial statement for the
determination of non-operating assets
► Non-operating assets fully subject to taxation
Types of tax exemption
► Acquisition of privileged assets up to mEUR 26:
regular relief (85%) or optional relief (100%)
► Acquisition of privileged assets within the range
of more than mEUR 26 and mEUR 90 („large
acquisitions“): reduction of regular or optional
relief by one percentage point for each full kEUR
750 exceeding mEUR 26 (upon irrevocable
request)
► Acquisition of privileged assets > mEUR 26:
assessment of need for tax relief: 50% of
„available non-privileged assets“ to be used for
tax payment
Other matters
► Amendments of the Tax Valuation Act:
retroactive reduction of capitalization factor
from 17.86 to 13.75 as of January 1, 2016
► Retroactive application of the amended
Inheritance and Gift Tax Act as of July 1, 2016
The amended Inheritance and Gift Tax Act
4. Page 4
Significant deterioration for large donations or
inheritances
Tax-privileged
assets
received by
donation or
inheritance
Assets with value
≤ mEUR 26
Assets with value
> mEUR 26
≤ mEUR 90
Assets with value
> mEUR 90
Types of tax
exemption
Regular relief:
85% exemption
Optional relief:
100% exemption
(upon irrevocable
request)
Option 1:
Reduction of regular /
optional relief by one
percentage point for each
full kEUR 750 exceeding
mEUR 26
(upon irrevocable request)
Option 2:
Assessment of need for
tax relief
(upon request)
Assessment of need for
tax relief
(upon request)
Otherwise no tax
exemption granted
Several transfers by donation or inheritance of tax-privileged assets between the same
persons within a ten years rolling period are added together
The amended Inheritance and Gift Tax Act
5. Page 5
Assessment of need for tax relief
Available assets = 50% of the FMV of the
assets transferred with the inheritance or
gift which are not privileged as well as non
privileged assets already belonging to the
acquirer
The acquirer is not able to pay the tax from
his available assets
Tax that exceeds his
available assets will be
remitted upon request
► If the assessment of need for tax relief is
requested, it cannot be combined with other
tax reliefs
► Inheritance tax will be remitted according to
the following requirements:
► Seven years sum of salaries
requirement and holding regulations
have to be fulfilled
► No further gratuitous acquisition of
available assets inter vivos or by way of
death within ten years (otherwise:
revocation of tax remittance, new
request is possible)
► Furthermore, the tax payment can be
deferred up to 6 months. During this period
can acquirer can sell private or non-
operating assets to obtain liquidity
The amended Inheritance and Gift Tax Act
6. Page 6
Discount on value for assets of family
businesses
Discount on value of up to 30 % for family businesses if the following requirements are
put down in the relevant partnership or shareholders agreement:
Limitation of distributions or
withdrawals:
Maximum of 37.5 percent of the taxable
profit after deduction of the taxes on
income falling to the relevant share in
profits; withdrawals for the payment of
taxes on income can be made additionally
Limitation of disposition of
partnership interest or shares:
Disposition limited to other partners /
shareholders, family members or a
foundation set up in the interest of a
family
Limitation of compensation:
► In the case of the withdrawal of a
partner / shareholder, the
compensation must be lower than the
FMV of the interest in the partnership
or share in the corporation
► The discount on value is proportional
to the limitation of the compensation,
limited to 30%
Other aspects:
► It has to be verified by the taxpayer
that these requirements are actually
met
► The requirements have to be met
within the two years before and
twenty years after the acquisition
The amended Inheritance and Gift Tax Act
7. Page 7
Reinvestment clause
► In the case of an acquisition by way of succession, a so-called ‘reinvestment
clause’ is granted for non-operating assets
► This means that non-operating assets retroactively become tax privileged
assets if they are reinvested within the inherited business into assets which
would have been tax privileged
► Overview
► Applies only to acquisitions by way of succession
► Investment of non-operating assets in tax privileged assets
► Preconceived plan of the deceased required (unclear how this can apply in the case of a
company)
► Reinvestment within two years after deceased‘s death
► Consequence: Retroactive conversion of non-operating assets into tax
privileged assets
The amended Inheritance and Gift Tax Act
8. Page 8
Valuation of companies
► Amendment of the simplified capitalized earnings valuation according to the
Tax Valuation Act
► The capitalization rate to be applied on the average net operating income of
the three last fiscal years is no more linked to the interest rates of long-term
public bonds, but is set to 13.75 (previously 17.86), and will in the future be
adjusted by the Federal Ministry of Finance with the consent of the Upper
House of Parliament
► Example:
► Average net operating income mEUR 2 × 17.86 = company value of mEUR 35,72
► Average net operating income mEUR 2 × 13.75 = company value of mEUR 27,5
► This amendment applies retroactively as of January 1, 2016, which can also
have adverse effects for the tax exemption of business property under the
rules applicable until 30 June 2016
The amended Inheritance and Gift Tax Act
9. Page 9
Retroactive Application of the amended
Inheritance and Gift Tax Act
► Prevailing view in professional literature: The retroactive application of the
amended Inheritance and Gift Tax Act as of July 1, 2016 is unconstitutional.
Therefore, no Inheritance and Gift Tax applies between July 1, 2016 and
November 4, 2016
► The former Inheritance and Gift Tax Act remained in force and was applicable
until November 4, 2016, again on the basis of the argument that the
retroactive application of the amended Inheritance and Gift Tax Act as of July
1, 2016 is unconstitutional
► According to the wording of the law: The amended Inheritance and Gift Tax
Act is to be applied retroactively as of July 1, 2016
The amended Inheritance and Gift Tax Act
10. Page 10
Summary and Outlook (1)
► The amended Inheritance and Gift Tax Act provides legal certainty, though it is very
likely that the Federal Constitutional Court will declare the amended act unconstitutional
at a later stage.
► The retroactive application of the act between July 1 and November 4, 2016 might be
unconstitutional, too.
► The transfer of private assets influences the tax burden of tax privileged business
assets if the assessment of need for tax relief applies
► Tax privileged and non tax privileged assets should be legally segregated and
transferred separately:
► 100% optional relief only applies if non-operating assets do not exceed 20% of the total assets
► Non tax privileged assets exceeding 10% of the tax privileged assets are fully subject to tax
► The transfer of non privileged assets/private assets correlates negatively to the assessment of
need for tax relief
Legal certainty as a result of the amended Inheritance and Gift Tax Act
Long-term tax planning inevitable for large business acquisitions (1)
The amended Inheritance and Gift Tax Act
11. Page 11
Summary and Outlook (2)
► For large gifts or inheritances > mEUR 26 the respective tax consequences should be
examined at an early stage.
► Regarding the first gift from parent to child, a transfer of tax privileged assets should be
taken into consideration to benefit from the assessment of need for tax relief
► The discount on value for family businesses of up to 30% is applicable only in
exceptional cases due to its strict requirements.
► Upfront gifts to minors/young adults require new considerations regarding asset
structuring and intra-family rules („family governance“)
Long-term tax planning inevitable for large business acquisitions (2)
The amended Inheritance and Gift Tax Act
12. Page 12
Summary and Outlook (3)
Long-term tax planning also inevitable for private assets
► Since private assets cannot be transferred tax privileged anymore, long-term tax planning is
required
► Due to the fact that the transfer of private assets directly affects the tax burden for large gifts or
inheritances of tax privileged assets, a clear tax strategy over a long period of time is essential
► Granting an usufruct (lifelong use) will play an important role to reduce the value of available assets
that are relevant for the assessment of need for tax relief, especially in the field of real estate.
► Family foundations will become a more relevant planning tool to minimize the Inheritance and Gift
Tax burden
► Alternative privileged assets like agricultural and forestry land should be considered for tax planning
purposes
► Income tax consequences have to be taken into account during all stages of succession planning
Joint and long-term (tax and civil law) planning is essential in succession planning
for family businesses
►
The amended Inheritance and Gift Tax Act
14. Page 14
Notes to this presentation
By nature, the information made available within the context of this presentation can neither be
exhaustive nor tailored to the circumstances of an individual case. This information does not constitute
advice, any other form of legally binding information or a legally binding proposal on our part.
This presentation is based on the law as of the date of this presentation and reflects our interpretation of
the applicable laws and regulations and the corresponding court rulings.
In the course of time, laws, their interpretation and court rulings may change. Such changes may
necessitate a revision of this presentation.
Please note that we are not obliged to review and revise this presentation in the event of changes in the
underlying facts, assumptions, laws or court rulings, unless we are engaged to do so.
We make no warranty, guarantee or representation as to the accuracy or completeness of the content of
this presentation. To the extent legally permissible, we do not assume any liability for any action or
omission that you have based solely on information provided herein. This also applies should the
information prove to be imprecise or inaccurate.
The amended Inheritance and Gift Tax Act
15. Page 15
Your contact at EY
The amended Inheritance and Gift Tax Act
Ernst & Young GmbH
Wirtschaftsprüfungsgesellschaft
Mergenthalerallee 3-5
65760 Eschborn/Frankfurt
Germany
Tel. +49 6196 996 24486
Mobil +49 160 939 24486
Fax +49 181 3943 24486
Email joergchristian.klette@de.ey.com
Jörgchristian Klette
Executive Director
Private Client Services Tax
