BERLIN: Germany’s ruling coalition agreed Monday to restrict tax exemptions on some corporate successions, allowing them only for smaller companies or those in difficulties, after months of debate over what critics have called a lopsided regime that benefits mainly the country’s richest families.
Germany will toughen business-friendly rules that have allowed heirs to corporate fortunes to avoid inheritance taxes in the past decades and helped shape a dense web of midsize businesses.
The government aims to get the bill passed by both houses of parliament by July 8.
The changes come in response to a request from the country’s highest court, which in 2014 ruled that the 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.
German Finance Minister Wolfgang Schäuble defended the change as balanced, saying it would ensure German family businesses “can continue to invest and preserve jobs.”
But business owners said that while the continued exemption for the smallest of businesses is welcome, the new rules would be too onerous and bureaucratic for heirs to larger companies.
“For a large number of family firms, the inheritance-tax burden will increase considerably, and not just a few big companies will face such a strong increase that it could trigger family owners to relocate or sell,” said Rainer Kirchdörfer, head of the Foundation for Family Businesses.
At present, companies with fewer than 20 staff—about 90% of German companies—are automatically exempted from inheritance taxes.
Under the proposed rules, which will have to be written into a bill and put to parliament, heirs to businesses will be liable to inheritance tax if they employ more than five staff and their assets exceed a given threshold.
Individuals inheriting business assets worth more than €26 million ($29.3 million) would have to pay death duties unless they can prove that they are entitled to a tax break—by showing that they don’t have enough assets to cover the tax bill.
If the inheritance exceeds €90 million, no more tax breaks would apply. But small companies with up to five full-time staff would generally continue to enjoy a general tax exemption.
Although the government kicked off the overhaul talks about a year ago, it had struggled to find an agreement.
The bill is expected to pass in the lower house of parliament, where the ruling coalition holds a comfortable majority. But approval in the upper house is uncertain because the ruling coalition doesn’t have a majority there.
Small, family-owned businesses are at the heart of the German economy, and politicians and business representatives have long argued that the tax privilege preserved jobs. Some economists, on the other hand, have argued that it has also helped concentrate wealth in Germany in the hands of a few large industrial dynasties.
Family-owned companies account for 91% of German corporations, 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.
