BERLIN: The conciliation committee of Germany’s lower and upper house of parliament overnight reached a compromise on changing the country’s inheritance tax rules, a move needed after the highest court had ordered an overhaul of the corporate succession regime.
The committee agreed that people inheriting family-owned companies will continue to enjoy preferential tax treatment if they hold on to the company and preserve jobs, but conditions for enjoying tax breaks have been tightened.
Company valuations of family-owned businesses were lowered but not as much as previously planned, officials said. Those struggling to pay inheritance tax are allowed to defer the due tax interest-free for seven years instead of the current 10 years.
Luxury goods, such as old-timers, yachts or artworks, won’t get tax breaks, officials said early on Thursday.
The agreement still requires approval from the lower and upper houses of parliament, which is expected to be forthcoming because the conciliation committee consists of lawmakers from both houses who have agreed on the details.
The deal comes at the last minute, as Germany’s highest court had ordered the government to reform by the end of June this year the law that benefits mainly the country’s richest families or face the court discussing possible amendments to the rules when it meets next week.
The court in 2014 ruled that the inheritance tax law violated the constitutional principle of fair taxation when preferential treatment was extended to all companies—including large corporations—without case-by-case checks being performed as to whether such exemptions were economically justified.
The near-blanket exemption from inheritance taxes for corporate successions has helped make Europe’s largest economy home to some of the world’s oldest and wealthiest corporate dynasties and some of the most tightly held businesses in the world.
The agreement reached overnight earned mixed reactions. Eric Schweitzer, president of the DIHK German Chambers of Commerce, said it was good that family-owned businesses now have legal certainty, which is a prerequisite for investments and hiring staff.
“Company valuation is now more realistic,” Mr. Schweitzer said. “However, handing over companies to the next generation will become more expensive for many companies.” Others said the deal was too complicated.
“Politicians are groping along from one highly complex rule to the next in a well intentioned bid to secure jobs and ensure that firms can make the transition from one generation to the next,” said Ifo President Clemens Fuest. “It would be better, however, to cut the Gordian knot altogether, abolish all exceptions and levy an 8% tax on all forms of wealth regardless of whether it is held in firms, real estate, shares, cash or other assets.”
The conciliation committee’s deal also states that companies with up to five staff are automatically exempted from inheritance tax. At present, companies with fewer than 20 staff—about 90% of German companies—enjoy this preferential treatment.
Family-owned companies account for 91% of German businesses, one of the highest levels in the world. The Mittelstand, the small to midsize companies that make up the backbone of the German economy and largely account for the country’s export prowess, are often family-owned.
They generate more than half of the country’s economic output and employ 56% of its workforce, according to the Foundation for Family Businesses. German inheritance tax revenue rose by an annual 15.4% to a record €6.3 billion ($7.03 billion) in 2015.
