Brexit tax

Mittelstand blindsided by Brexit tax bill

Supercars in London
Some high net-worth Germans feel at home in London. Source: action press

It’s no secret that Brexit will impact German business — and the nation is back to nail biting about a no-deal, as talks this weekend failed to resolve critical issues.

Only now are many of the real consequences of Brexit becoming apparent. As well as restrictions on exports and imports, a hefty tax looks set to hit thousands of German businesses when the UK departs the European Union in March 2019.

Numerous managers fear the “Brexit tax,” the exit tax which will kick in for business owners with strong ties to Britain on the day the United Kingdom leaves the EU. That will hit the thousands of Germans working in the UK. They are there thanks to Germany’s long history of Anglophilia. Even today, British schools, colleges and banks are seen here as vital training schools for future business leaders.

But a sword of Damocles is hanging over their cosseted existence. Once Britain leaves the EU, property and money held by Germans in the UK becomes taxable at non-EU rates. For small business owners with too many ties to Britain, that could be very expensive indeed.

Horten’s Law kicks in

This is all because of the Horten Law, named after a 1970s supermarket tycoon who squirreled away his fortune in Switzerland, safe from the clutches of Germany’s tax authorities. The law bearing Helmut Horten’s name was passed to prevent a repeat, imposing tax penalties on those with strong ties to countries outside the EU.

Take one southern German businessman, who prefers to remain anonymous. He is extremely proud of his son, who studied at Cambridge and now has an important job in the City of London. His medium-term plan is to return one day to run the family business.

But suddenly things seem trickier, says his father: “I can’t pass on shares in the company, and I definitely shouldn’t die in the near future. If I do, we’re looking at a hundred million euros in taxes.”

Under German law, companies tend to be valued conservatively for tax calculation purposes. Properties, in particular, are valued according to their last purchase value, ignoring later increases in valuation. But Horten’s Law means that once a person moves overseas, those valuation increases immediately kick in.

As well as hitting small businesses, Germany’s “Brexit tax” could impact several high-profile, high-wealth German individuals based in Britain, including members of the Merck dynasty, worth a total of €15 billion ($17.33 billion), and of the Henkel family, owner of the €2 billion conglomerate of that name.

End legal uncertainty

To combat the problem, the federal government plans new tax legislation, due to take effect on March 29, 2019, the date of Brexit. This would impose a moratorium until the end of 2020. But even this exception will only apply to those based in the United Kingdom on June 23, 2016, the date of the Brexit referendum.

However, the Foundation for Family Businesses says the proposed legislation is dangerously limited. Rainer Kirchdörfer, an executive with the foundation, says an end to legal uncertainty is urgently needed.

Already if a small family-run company sends a relative to run a US subsidiary or build a Chinese factory, they can eventually end up liable to pay tax on increased valuations of company assets.

But Brexit could trigger thousands of new cases, saddling small businesses with massive tax bills. “It is high time that tax structures supported the globalization of German family businesses, not the reverse,” said Mr. Kirchdörfer.

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A version of this article originally appeared in the business weekly WirtschaftsWoche, a sister publication of Handelsblatt Global. To contact the authors: Christian.Ramthun@wiwo.de

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