Inheritance Compromise

Death and Taxes

Everything is picobello for Mr. Schäuble. Source: Reuters
Everything is picobello for Mr. Schäuble.
  • Why it matters

    Why it matters

    The conservative Christian Social Union and center-left the Social Democratic Party have fought over issues ranging from means testing to the threshold where taxes kick in, with Finance Minister Wolfgang Schäuble trying to forge a compromise.

  • Facts

    Facts

    • A bill drafted by Mr. Schäuble reportedly does not go far enough for the CSU but too far for the SPD, suggesting the goal of getting the bill out of the cabinet is still not guaranteed.
    • Competing demands between publicly owned and family-owned businesses complicate efforts to arrive at a solution.
    • Another thorny issue is whether the personal assets of heirs should be included in their inheritance tax calculations.
  • Audio

    Audio

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Peter Struck, the former parliamentary leader of Germany’s center-left Social Democratic Party, once said no legislation should ever come out of parliament in the form it entered as a bill. The honor of elected officials demands that they shape the legislation, he said.

Nothing quite proves the rule so much as Germany’s impending inheritance tax reform, one of the most divisive measures facing the country at the moment.

The reforms, which would impose higher taxes on the heirs of Germany’s many family-owned businesses, follow a ruling by Germany’s constitutional court that found the government has granted far too many exemptions to wealthy company heirs.

After much coalition diplomacy, ministers with membership cards from the SPD and Bavaria’s conservative Christian Social Union, the CSU, have agreed to push through a bill drafted by Finance Minister Wolfgang Schäuble, a member of Chancellor Angela Merkel’s Christian Democrats, the CDU.

Yet sources within the awkward right-left governing coalition say that doesn’t necessarily mean the CSU and SPD actually stand behind the plans. For the CSU, the reforms still impose too high a cost on family businesses that form the backbone of Germany’s economy. For the SPD, the plans are too easy on those wealthy family members that can afford to pay taxes on the massive inheritances they receive.

Marginal changes made to the bill by Mr. Schäuble following weekend negotiations that benefit company heirs are not enough for the CSU, but already go too far for the SPD. The single goal of this arduous operation was to get a bill through the cabinet and introduce it to parliament. If not, the CSU and SPD would have continued to wrangle for months and quite possibly never reach an agreement. They would have achieved the worst possible result. Company heirs would receive no exemptions of any kind from the inheritance tax.

The reason for push is the deadline set by Germany’s Federal Constitutional Court. If no reform is enacted by June 30, 2016, the highest court may summarily overturn all exemption regulations currently applicable. A constitutional judge referred to this in January.

As it now stands, those who inherit companies can completely avoid taxes upon receipt of the company and its facilities.

Compared to other heirs, the privileges enjoyed by company heirs are much too lavish for the judges.

As it now stands, those who inherit companies can completely avoid taxes upon receipt of the company and its facilities. The judges stipulated that present rules must be more stringent, particularly for heirs to large companies. They should be spared only if the company will directly suffer from payment of the taxes. The judges declared this would be determined by a means test.

Mr. Schäuble originally sought to administer this test on any inheritance of €20 million ($21.9 million) or above, but now has increased the threshold to €26 million in the bill submitted to Ms. Merkel’s cabinet. Meanwhile, the threshold for means testing family-owned companies, where company partnership agreements prescribe disposal restraints on company assets, would be €52 million.

Mr. Schäuble still wants to include private assets of the heirs in the test. In another concession to heirs, however, he wants to spare them the test if they agree to pay a bit more inheritance tax than they would have if they’d passed the needs test. This solution is also more generous than in the first draft.

Conversely, Mr. Schäuble is more generous with smaller companies employing four to 15 employees. It supposedly will be easier for them to benefit from tax deductions than larger businesses, while women on maternity leave along with trainees and apprentices would not be included in the job count.

The eight top business associations, among them the Federation of German Industries or BDI, and the German Chambers of Commerce and Industry, the DIHK, are demanding the threshold for large company inheritances be raised further to €100 million.

They also complain that any heir choosing the compromise model must justify its continuance to the tax office for the 10 years prior to receiving the inheritance and 30 years after.

Family-owned businesses, meanwhile, are turning to experts who argue it’s a violation of the constitution to include private assets in the accounting. CDU Parliament member Fritz Güntzler said, “For systemic reasons, the needs test should be applied to companies” and not the heirs, but he adds that including private assets could occur if a company is prematurely handed over to the children. They usually don’t yet have assets of their own, he noted.

The debate will no doubt be continued by parliamentarians in the Bundestag.

 

Donata Riedel covers tax policy from Berlin. To contact her: riedel@handelsblatt.com

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