Family Breaks

Unusual Allies on Inheritance Tax

Schaeuble-DPA
Who are your friends. German Finance Minister Schäuble faces widespread opposition to his inheritance tax plans.
  • Why it matters

    Why it matters

    Around 90 percent of German companies are family-run, and could face big inheritance bills if the plans move forward.

  • Facts

    Facts

    • A top court ruled last December that inheritance tax breaks for family-run businesses were illegal.
    • German finance minister Wolfgang Schäuble proposed a revised law last month that has been rejected by much of his own center-right CDU party and backed by state finance ministers from the left-leaning SPD instead.
    • Each of the 500 largest family companies in Germany are worth more than €100 million, according to a study by the Center for European Economic Research.
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    Audio

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Germany’s political scene has been gripped in the past few weeks by a peculiar fight over changes to inheritance tax breaks for the country’s storied family-owned companies.

It’s a battle that is creating odd political partnerships and pitting business groups against each other. The outcome will impact how nearly 90 percent of German companies that are family owned are passed down to future generations.

The wrangling began in December, after a top court ruled that the broad exceptions which exempt family-run businesses in Germany from paying inheritance taxes were illegal, and gave the government until mid-2016 to produce a new, fairer law.

Last month, Germany’s finance minister Wolfgang Schäuble, unveiled a proposal that would dramatically scale up the government’s earnings from family-run companies to satisfy meet the court’s directive.

Ironically, Mr. Schäuble’s backers are mostly from the political opposition. At a meeting of financial ministers from federal and state governments, Mr. Schäuble, a member of the center-right Christian Democrats of Chancellor Angela Merkel, found most support for his proposal from Social Democrats, the junior partner in Ms. Merkel’s government.

“Mr. Schäuble’s changes would create a property tax under the cloak of the inheritance tax law.”

Georg Crezelius, Linklaters law firm

Mr. Schäuble wants to introduce a means test: Anyone who inherits a company with a value more than €20 million will have to pay inheritance tax, unless they prove they don’t have enough assets to pick up the tab.

The private assets of their heirs will be factored into their ability to pay.

Businesses lobbies have launched a fierce attack on the plan, arguing that to include private assets that have not been inherited is itself unconstitutional. In all other cases, they note, tax authorities only look at the inheritance.

Mr. Schäuble’s proposed change would create a “property tax under the cloak of the inheritance tax law,” wrote Georg Crezelius of the Linklaters law firm, in a report for the German foundation of family businesses. A copy of the report was made available to Handelsblatt.

Large business groups including the Federation of German Industries, or BDI, and Association of German Chambers of Commerce and Industry have backed the family group. They are also supported by Markus Söder, Bavaria’s finance minister and a member of the Christian Social Union, the CDU’s Bavarian sister party.

Instead, the large business groups say the tax should be based on qualitative benchmarks that look at what the company can afford to pay: Family companies would be clearly set apart from corporations, and the heirs’ private assets would remain untouched.

LutzGoebel-DavidKlammer-Laif
Hands off my assets. Lutz Goebel is standing up for family-run firms. Souce: David Klammer/Laif

 

Others are convinced that only a quantitative test – looking at whether and how the tax reduces a company’s liquidity – would meet the requirements of constitutional judges. The idea is being floated by another business association and backed by Thomas Schäfer, the finance minister from the state of Hesse and a member of Ms. Merkel’s party.

Mr. Schäfer sees himself in a middle position between the larger industry groups and Mr. Schäuble.

“We believe it would be difficult to precisely define what a family company is. The probability is very high that we are not going to get around a needs test with heirs,” he told Handelsblatt.

Wherever the stand, it seems clear that businesses are united in their rejection of Mr. Schäuble’s benchmarks as they stand.

“They would be a clear additional burden for family companies,” said Rainer Kirchdörfer, who chairs the foundation for family businesses.

In particular, he opposes Mr. Schäuble’s definition of large company inheritances as starting at €20 million. The threshold should be over €100 million, he said.

Mr. Schäuble fears such a high threshold would exclude too many companies, and therefore not be constitutional.

The foundation cites a new study showing each of the 500 largest family companies are worth more than €100 million. They represent a total of €1.2 billion in sales and employ more than 3.7 million people, according to the study by the Center for European Economic Research, or ZEW.

Mr. Schäuble has other arguments. Unlike the business groups, he argues that basing the requirement test on the ability of heirs to pay – rather than looking at the situation in companies – would be simpler, according to ministry sources.

The Federation of German Industries opposes that, too.

“To determine existing private assets of heirs would require disproportionately greater administrative effort,” said Markus Kerber, the group’s managing director.

The fight is not likely to end any time soon.

 

Donata Riedel writes about economic policies for Handelsblatt from Berlin. To contact her: riedel@handelsblatt.com

 

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