All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Inheritance relief on business property transfer unconstitutional

Lothar Siemers and Martin Liebernickel of PwC explain the background to, and fallout from, a recent judgment stating that inheritance tax relief on the transfer of business property is unconstitutional.


Because estate planning and succession in a family business are quite complex, fiscal considerations should dominate the transfer of the family business and business owners should carefully consider any action

In a judgment released December 17 2014 the German Constitutional Court declared provisions of the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz – ErbStG) dealing with a tax relief on the transfer of business property unconstitutional (1 BvL 21/12). The provisions (§§ 13a, 13b and 19 sec. 1 ErbStG) shall continue to apply for the time being, but the legislature must adopt new regulations by June 30 2016 at the very latest.

Background and history

Since January 1 2009, German family businesses and their owner families have benefitted from generous inheritance and gift tax reliefs in cases of succession upon death or anticipated succession upon gift. Irrespective of the legal form of the family business – sole proprietorship, partnership or corporation – the taxable value (in general terms equal to the fair market value) of the family business which is transferred by inheritance or gift is 85% exempt from inheritance and gift tax if he following requirements are met:

  • The tax benefit is available for agricultural assets, business assets, interest in business partnerships and shares in corporations being domiciled within the EU. In case of a corporation the minimum shareholding of the transferor must exceed 25% of the subscribed share capital. However, lower shareholdings are favoured as well in case the transferor agrees upon a pooling agreement with other shareholders who have, together with the transferor, more than 25% of the shares in hand (the "family component").

  • The successor has to run the business and keep the partnership interest or the shares in the family company for at least five years following the day of transfer (minimum holding period). If the successor sells the shares or closes down the business within that period the exemption will be reduced pro rata temporis.

  • At the transfer date, the so-called "administrative assets" must not exceed 50% of the tax value of the business. "Administrative assets" are defined by law as real estate being rented out to third parties, shares in companies of 25% or less, securities, stocks, funds and bonds or comparable papers, liquid financial resources such as cash, cash at banks, and all receivables towards third parties (for example, customers) and precious metals and collections (such as art or coins). In case of a multi-level group of companies this requirement must be checked per legal entity; if a subsidiary does not fulfil the requirement its value will be treated as an "administrative asset" at the level of its parent company and so on up to the holding (cascade effect). This is an all-or-nothing requirement: if the "administrative assets" exceed the quota the tax relief will not be granted; if so, the tax relief will be granted including the value of the "administrative assets" (except if those assets belonged to the business property for less than two years).

  • The aggregate wages of the five years following the transfer on average must not be lower than 80% of the aggregate wages on average of the five years before the transfer. The "aggregate wage clause" does not apply to businesses with 20 employees or less. In case the quota is not reached within that period the exemption will be reduced pro rata.

Upon application a tax relief of 100% is available in case the minimum holding period amounts to seven years, the "administrative assets" do not exceed 10% of the tax value of the business and 100% of the aggregate wages on average will be kept for seven years. Between 2009 and 2013 approximately 30% of all family businesses opted for the 100% exemption from inheritance and gift tax. In case of a multi-level group of companies, only the ultimate holding company must have less than 10% "administrative assets"; the subsidiaries just need to be below the 50% threshold.

By decision of September 27 2012, the Federal Finance Court submitted a formal question to the Federal Constitutional Court. It asked whether § 19 sec. 1 ErbStG, as applicable in 2009, and in conjunction with §§ 13a and 13b ErbStG, is unconstitutional because it violates article 3 sec. 1 of the German constitution. The Federal Finance Court argued that § 19 sec. 1 ErbStG in conjunction with §§ 13a and 13b ErbStG violated the principle of equality. The Federal Finance Court justified its opinion with two main arguments. First of all the tax relief for the transfer of business assets – compared to private assets being taxed without any relief – was without a compelling reason by far too extensive and not covered by the political goal of the legislator to safeguard jobs by not jeopardising the commercial success of German family businesses. And secondly, due to material loopholes in the legal provisions taxpayers could, with a little planning and structuring, circumvent the requirements for the tax relief mentioned above and transfer private assets at zero rate, simply by covering them in a business mantle (cash box companies).

On June 6 2013 the government amended the tax relief provisions to close the most obvious loopholes in the law, especially to ban the utilisation of cash box companies. Nevertheless, almost 18 months later the Constitutional Court partly followed the main arguments of the Federal Finance Court and declared the tax relief for partly unconstitutional.

German Constitutional Court's decision

The German Constitutional Court did not fundamentally question the principle to grant tax relief for the transfer of family businesses by inheritance or gift. In principle, the court viewed the unequal treatment effected by the tax relief as being compatible with the principle of proportionality, even if it leads to a tax exemption of 100%. According to the court, the legislator is largely free to decide which instruments to use for ensuring a targeted promotion of its objectives. However, the judges decided unanimously that the following violations of the constitution result in the incompatibility of the submitted provisions with article 3 sec. 1 of the German constitution:

  • The legislator has discretion to grant inheritance and gift tax relief to small and medium-sized family businesses managed by their owners in order to ensure their continued existence and to preserve jobs. However, such a substantial tax relief is disproportionate to favour family businesses that go far beyond the range of small and medium-sized businesses without an economic needs test. The legislator will have to define exactly which family business will have to go through an economic needs test and how that test may look like.

  • The legislator justified the unequal treatment of business property transfers in comparison to the transfer of private wealth with the political objective to safeguard jobs. However, under given circumstances approximately 90% of the family businesses may not be affected by the "aggregate wages clause" because they do not employ more than 20 people. Thus, it is disproportionate to exempt family businesses with 20 employees or less from the application of the "aggregate wages clause". The legislator will have to limit the exemption to businesses with a very small number of employees.

  • It is disproportionate to exempt businesses containing up to 50% "administrative assets" for tax purposes. In general terms, it is a legitimate and reasonable objective to support productive assets and to prevent circumvention through tax planning. However, this does not apply if up to 50% non-operative assets benefit as a whole from a tax relief. There are no sound reasons for a justification of such an extensive inclusion of "administrative assets" in the tax relief. The provision can hardly achieve its goal to prevent opportunities for tax planning; on the contrary, it is more likely that it will encourage the relocation of private assets into business assets. In multi-layered corporate structures, the "all-or-nothing principle" and the test per single entity result in cascade effects, which can be used to design corporate structures which benefit from the tax relief even though – in a consolidated view – "administrative assets" predominate.

  • Finally, the tax relief provisions are unconstitutional insofar as they permit designs and structures that lead to unjustifiable unequal treatment, especially in constellations that bypass the obligation on total wages and salaries through corporate restructurings, that make use of the 50% "all-or-nothing principle" in multi-level group structures, as well as to so-called cash box companies.

These violations result in the incompatibility of the tax relief provisions with article 3 sec. 1 of the constitution. The legislator will have to adopt new regulations by the end of June 2016 at the very latest. However, the continued validity of the unconstitutional provisions does not mean that there is a protection of legitimate expectations with regard to new regulations that apply retroactively as of December 17 2014, and which do not recognise an "excessive utilisation" of the tax relief.

To-dos and options for the legislator

The legislator will now have to modify the tax relief provisions according to the guidelines of the Constitutional Court and to eliminate the existing violations due to disproportionate clauses. Hence, he must pay attention to the requirements laid down by the court.

Although the legislator has discretion to award preferential treatment of family businesses and even to grant a tax relief to 100%, he will have to focus on three main topics to achieve the political objectives while limiting the tax relief to productive business assets and avoiding unwanted tax structuring:

  • Definition of the size of a family business which may fall outside of the scope of small and medium-sized companies and of the requirements for the "economic needs test" for large family businesses;

  • Complete new design of the legal provisions that deal with "administrative assets"; and

  • Determination of the threshold up to which the "aggregate wages clause" may not be applicable.

The Ministry of Finance already announced that the intention is to amend the existing law just to the extent necessary to eliminate the violations of the constitution. In addition, the plan is to implement the new provisions as soon as possible. The responsible tax inspectors already started to work out the details of a draft for the new law.

According to unofficial announcements, it is most probable that the threshold for the "aggregate wages clause" will be reduced to businesses with less than five employees, alternatively an average sum of wages of not more than €1 million. In addition, to avoid corporate structures that circumvent the threshold, a consolidated view of the family business will be safeguarded by the planned amendments.

As far as "administrative assets" are concerned, a paradigm shift is in discussion. In future, the "all-or-nothing principle" with a threshold of 50%, respectively 10%, could fall away. Instead, the positive balance of "administrative assets", which will exceed the sum of all liabilities and accruals of the family business, may not be viewed as business property anymore. Thus, to the extent to which liquid funds and receivables will be covered by equity, they will fall outside of the scope of the tax benefit and will be taxed like any private property. It can be expected that the legislator will implement a percentage up to a positive balance as not harmful, to avoid major disadvantage for family businesses which are mainly financed by equity. To avoid the existing cascade effects, the new provision might view the total sum of "administrative assets" on a consolidated basis in case of a multi-layered group of companies.

The most problematic item to solve will be the definition of the requirements for the "economic needs test". A large family business might be defined either by existing rules for tax audits (for example by a turnover of more than €100 million) or according to the size ranges based on commercial law (for example for annual audits or consolidated financial statements for concerns). The legislator might outline "economic needs" alongside the liquid funds being available for a distribution to the owner family without any restriction from the business side of view (all assets being essential for the business). In addition, the legislator could avoid substantial liquidity problems of the family company to finance the inheritance tax by introduction of tax payments in annual instalments and/or generous deferrals in payment.

Consequences for family business owners

Family business owners who intend to transfer assets in the future must consider carefully whether transactions within the scope of the current law or within the new law that will be applicable after June 30 2016 (at the very latest) are more favourable. It is likely that the tax relief for business assets as it exists today will become less attractive under the new law, especially for the owners of large family businesses.

However, the new provisions may come much earlier than expected. Thus, it may be advisable to bring forward existing plans to transfer the family business in the near future. As it might be that the legislator will introduce some provisions retroactively, any transfer agreements like gift contracts should contain clauses according to which the donor is entitled to withdraw the gift if the transfer would lead to an unexpected tax burden.

Nevertheless, the tax relief for business assets will generally continue to apply. Estate planning and succession in a family business are quite complex, fiscal considerations should dominate the transfer of the family business; thus, business owners should not jump the gun but carefully consider any action.

Lothar Siemers




Tel: +49 211-9812757


Lothar Siemers is a tax and legal partner at PwC Düsseldorf.

He started working for legacy firm Coopers & Lybrand in Düsseldorf in December 1991 in the tax department. He became tax partner at PricewaterhouseCoopers as of October 1 1997.

Lothar is specialised in advising national and international family companies and high net worth individuals. He is an active member of the European PwC Private Wealth Group – from 2003 to 2013 he was the chairman of that group – and chairman of the German Private Client Solutions Team of PwC. Lothar has gained substantial experience over many years in succession planning for family companies and their owner families as well as for high net worth individuals. In addition, he is advising on personal financial and retirement planning for top senior executives of big national and international corporates.

Since 1998 Lothar has been a member of the Succession Planning Group of the German Institute of Chartered Accountants (Institut der Wirtschaftsprüfer – IDW). In addition, Lothar is a lecturer at the University of Münster and at the ADG in Montabaur on succession planning, as well as a speaker on external and PwC internal seminars on succession planning & inheritance tax.

Lothar is an author of publications dealing with the tax and legal affairs of family business owners and high net worth individuals, especially with regard to estate planning and inheritance tax.

Martin Liebernickel




Tel: +49 69-95851822


Martin Liebernickel is a tax and legal director at PwC Frankfurt.

He started working for EY in Stuttgart in February 1999 in the tax department. He moved to PwC in Stuttgart, also in the tax department, in March 2003.

Martin is specialised in advising national and international family companies and high net worth individuals. He is an active member of the European PwC Private Wealth Group – and leads a Private Client Solution Team of PwC Frankfurt. Martin has gained substantial experience over many years in succession planning for family companies and their owner families as well as for high net worth individuals and family foundations.

Martin is lecturer at the RheinMain University, as well as a speaker on external and PwC internal seminars on succession planning and inheritance tax.

Martin is an author of publications dealing with the tax and legal affairs of family business owners and high net worth individuals, especially with regard to estate planning and inheritance tax.

more across site & bottom lb ros

More from across our site

The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2023 ITR Tax Awards in Asia-Pacific, Europe Middle East & Africa, and the Americas.
Tax authorities and customs are failing multinationals by creating uncertainty with contradictory assessment and guidance, say in-house tax directors.
The CJEU said the General Court erred in law when it ruled that both companies benefitted from Italian state aid.
An OECD report reveals multinationals have continued to shift profits to low-tax jurisdictions, reinforcing the case for strong multilateral action in response.
The UK government announced plans to increase taxes on oil and gas profits, while the Irish government considers its next move on tax reform.
War and COVID have highlighted companies’ unpreparedness to deal with sudden geo-political changes, say TP specialists.
A source who has seen the draft law said it brings clarity on intangibles and other areas of TP including tax planning.