Azernews.Az

By Bloomberg

The German government must revise rules that allow families to transfer companies from one generation to the next without having to pay estate tax.

The current inheritance law exemption gives an unfair advantage to family-owned businesses over individuals passing on non-company assets and is unconstitutional, the Karlsruhe-based Federal Constitutional Court said in a ruling today. The court gave the government until July 2016 to amend the current tax rules.

Political and business leaders have expressed concern about the impact of the ruling on the country’s 3 million small and medium-sized companies, most of which are privately owned. Collectively known as the Mittelstand, these companies serve as the backbone of Europe’s largest economy.

Under the current law, corporate assets can be passed on tax free as long as the heirs keep the business for at least seven years without substantial firings. More than 130,000 family businesses with 1.6 million employees are set to change hands by 2018, according to the BVMW industry association.

About 20 percent of Mittelstand companies are concerned that an end to the tax exemption would threaten their continued operations, according to preliminary figures from the BVMW’s end-of-year survey of its 270,000 members. Another 10 percent say they’d have to invest less as a result.

More than 90 percent of German companies are family-owned, and those businesses generate more than half of private sector revenue and employ more than 50 percent of the workforce, according to the Munich-based Family Business Foundation.

Tax Tricks

The constitutional court’s ruling on the benefit follows a decision from the country’s highest tax court that the exemption unfairly privileges family companies over individuals transferring non-business assets. The tax court also said the current rules allow too many tricks to get tax breaks without preserving jobs.

Essentially, a business owner can transfer a company worth billions of euros tax free, while the heirs of an investor receiving stock or other assets may end up paying an estate tax of as much as 30 percent.

Merkel’s Christian Democrats promised ahead of the decision to take action if necessary. Finance Minister Wolfgang Schaeuble told magazine Der Spiegel in an article published over the weekend that he could introduce new discounts to spare family- owned companies from a higher tax burden.

The easiest solution to protect German business and treat everyone equally might be to completely abolish the inheritance tax, which brings in about 5 billion euros ($6.22 billion) to government coffers annually, said Roman Seer, a law professor at the Ruhr University Bochum.