Owners of small and medium-sized family businesses, which form the backbone of Germany’s economy, will continue to enjoy inheritance tax breaks, allowing them to transfer their companies to the next generation without taxation or at a reduced rate, a committee of lawmakers agreed Thursday.
The deal between politicians from Germany’s lower and upper house, the Bundestag and Bundesrat respectively, will restrict the transfer of assets to corporate assets only, excluding, for instance, art work, yachts and old-timer cars.
Germany’s Constitutional Court ruled in 2014 the inheritance law violated the principle of equal treatment and gave disproportional benefits to owners of family businesses compared with other citizens who handed over assets.
The maximum inheritance tax rate is 30 percent for partners and a maximum 50 percent for other beneficiaries.
Family-owned businesses play a crucial role in Germany’s economy, which is built upon so-called Mittelstand companies. Small and medium-sized firms employ 60 percent of all workers in the country and account for almost a third of corporate sales in Germany.
Current inheritance tax exemptions were meant to safeguard the continuation of family-owned businesses and not saddle the new generation with a tax bill that would lead to job reductions and capital shortage.
The Constitutional Court, however, forced Chancellor Angela Merkel and her coalition government of Christian Democrats and Social Democrats to reform the law. A committee of parliaments’s two houses agreed to the deal, which still needs to win approval from all members of the Bundestag and Bundesrat.
Under the deal, small family-owned business will keep their tax exemptions if the new owners continue operations for seven years and keep employment at the same level.
The exemption is valid for assets up to a value of €26 million, or $29 million. The inheritance tax gradually starts to apply after that level and fully applies for assets worth €90 million or more. The maximum inheritance tax rate is 30 percent for partners and a maximum 50 percent for other beneficiaries.