Germany's Bundesrat (Federal Council) adopted the new Inheritance Tax Act on 14 October 2016, which was published in the German Federal Law Gazette on 9 November 2016. What changes are there for family businesses? Here are the key changes at a glance.
The relief models for eligible estates remain unchanged. The previous options for tax relief largely remain in the case of inheritances up to EUR 26 million. This means that it is possible for business transfers to be up to 85% or even 100% tax-exempt. A condition for this is that the company heirs preserve the business's jobs, do not withdraw more than the current profits during the retention period and continue the business for at least five or seven years.
As was the case in the past, so-called payroll checks serve to examine whether the jobs transferred together with the business have largely been preserved. The thresholds for companies that must provide such evidence were lowered in the revised version of the law. In the future, only small-scale operations with up to five employees are exempt from the payroll checks.
There are new restrictions on relief when transferring sizeable estates. Should the value of the acquired eligible estate exceed the threshold of EUR 26 million, then the taxpayer can choose between a reduction in the relief (ablation model [Abschmelzmodell]) or an examination of the need for relief.
The extent to which the company disposes over non-operating assets already played a role in the past for tax relief. Non-operating assets are assets that are not mandatory for business operations (e.g. securities and lease property, but also stamp collections, vintage cars, yachts, etc.).
What is important here, if complete tax relief is desired, is that only up to 20% of the transferred assets may be non-operating assets. Otherwise only 85% relief is granted if this limit is exceeded. However, what is new in any case – even given full relief – is that non-operating assets exceeding 10% must be taxed.
The modifications to the German Valuation Act [BewG], with retroactive effect from 1 January 2016, can – despite declining enterprise values due to the reduced capitalisation rate – lead to negative effects for transfers conducted in the first half of 2016 if the corresponding non-operating assets ratio is unfavourable. In this regard it must be examined whether the affected taxpayers need to take action and possibly carry out a valuation pursuant to IDW S1 (Standard 1 of the German Institute of Public Auditors).
Please refer to the following PDF file (PDF 136.4 KB) for all of the important new rules at a glance.