The decision this week to eliminate tax-free inheritance for German family-owned companies – one of the biggest perks of the vaunted “Mittelstand’’ sector of small and midsized businesses – could fundamentally change the country’s competitiveness.
The ruling by Germany’s Constitutional Court in Karlsruhe to strike down the long-held inheritance tax exemption for family-owned companies sent a wave of uncertainty through the ranks of business owners. Some predicted a rise in firm sales, as families try to cash out and avoid inheritance levies.
“I hope the legislature will find the right balance that enables companies to stay in family hands and prevents a forced sale in case of succession,” Mark Bezner, the managing director of Olymp Bezner, a clothing maker in Bietigheim-Bissingen near Stuttart, told Handelsblatt.
Reinhold von Eben-Worlée, the director of chemical maker Worlée-Chemie in Hamburg, said of the ruling: “I feel insecure.”
“This will lead to double taxation, and that will hamper our competitiveness in a global world.”
The court said that inheritance tax exemptions for family-owned companies were disproportional and violated the principle of equal treatment. German law had granted a special tax exemption for family owned firms but not to individuals, whose heirs must pay taxes of up to 50 percent on inheritances.
The law is expected to negatively affect large, family-owned businesses.
More than 90 percent of the more than 3 million firms in Germany are family-owned, from auto parts and tools maker Bosch and publishing group Bertelsmann to one-man businesses such as the local baker and hair dresser.
“Companies need guarantees to plan ahead,” said Roland Mack, the managing director of the amusement park Europapark south-west of Stuttgart near the German border to France and Switzerland.
“Firms such as Europapark need to know which charges they face. If they are too high, we for instance have to reconsider additional investments for a planned water park,” Mr. Mack told Handelsblatt.
Even if the new tax on businesses takes effect – which might not happen until mid 2016 — German family-run firms will pay less in inheritance tax than their peers in other countries such as the United States or Belgium.
The effective inheritance tax of a company with total assets of €126 million ($155 million) is 3.8 percent in Germany, 4.8 percent in France, 10.2 percent in the United States and 16.5 percent in Belgium, Germany’s federal statistics office said.
In its ruling, Germany’s constitutional court said small company-owned firms would be allowed inheritance tax exemptions to guarantee continuity but bigger companies would only be able to use them in certain circumstances.
The German government has said it would only make small changes to the current inheritance law as required by the constitutional court. The German finance minister, Wolfgang Schäuble, reiterated this position to German daily Rheinische Post on Thursday.
Some experts have suggested a complete abolition or lowering of the inheritance tax rate but the most likely scenario is a more complicated system.
“This will lead to double taxation, and that will hamper our competitiveness in a global world,” said Joachim Borggräfe, a lawyer at Castle Law, specializing in taxation law in German companies.
Johanna Hey, a professor in tax law at Cologne’s University, had hoped for a full overhaul of the inheritance tax law but only expected more red tape.
“I assume it will become more complicated and more bureaucratic to qualify for a tax-free transfer of assets,” Ms. Hey told Handelsblatt.
How much more money will have to be paid remains unclear until the new rules come into force, which can take up to June 2016.
“Inheritance of shares in larger companies will most likely become more expensive because the inheritance tax privilege might not be applicable to such inheritances anymore. There will be stricter controls and distinctions over operational details,” Jens-Uwe Hinder, co-managing partner of law firm Morrison & Foerster’s Berlin office and the head of its German tax and accounting law practice, told Handelsblatt Global Edition.
The current law allowed family-owned businesses to free €70.8 billion of assets to be transferred to successors over the years 2009 to 2012, the court’s vice president, Ferdinand Kirchhof, said in its ruling. Inheritance and gift tax proceeds were around €4,5 billion annually over the same period.
“Pandora’s box has been opened,” said Mr. Hinder. “We can assume that from a political point of view, everything is debatable again.”
Anja Müller writes about family and small- and medium-sized firms, which form the backbone of Germany’s economy. Donata Riedel has worked for Handelsblatt for 20 years and writes about economic policy. Axel Schrinner writes about tax and finance policy for Handelsblatt. Franziska Scheven and Gilbert Kreijger are editors with Handelsblatt Global Edition in Berlin, covering companies and markets. To contact the authors: email@example.com, firstname.lastname@example.org, email@example.com, firstname.lastname@example.org, email@example.com.