Corporate succession - act now!

All the signs in­di­cate that key pro­vi­si­ons of the cur­rent Ger­man In­heri­tance Tax Act that fa­vor cor­po­rate as­sets will be held un­con­sti­tu­tio­nal by the Ger­man Con­sti­tu­tio­nal Court. Ac­cor­ding to un­of­fi­cial re­ports new pro­vi­si­ons are ex­pec­ted by next year at the la­test, be­cause if law­ma­kers are re­qui­red to bring these ru­les in line with the Con­sti­tu­tion, the Court is not li­kely to give them very long to do so. The­re­fore, it is li­kely that the tax bur­den on gifts and in­heri­tan­ces of cor­po­rate as­sets will in­crease.

© Fotolia

Un­der the cur­rent tax ex­emp­ti­ons for cor­po­rate as­sets, if the per­so­nal al­lo­wance of EUR 400,000 is used, a com­pany with a va­lue of up to EUR 2.66 mil­lion can be trans­fer­red to a child of the ow­ner tax free, pro­vi­ded that the pre­re­qui­si­tes for re­gu­lar re­lief are met. If the stric­ter re­qui­re­ments for full re­lief are met, then no in­heri­tance tax is in­cur­red even on much hig­her com­pany va­lues. This pre­fe­ren­tial tre­at­ment of cor­po­rate as­sets will in all li­ke­li­hood mean that the cur­rent ru­les will have to be amen­ded to com­ply with the ru­ling of the Ger­man Con­sti­tu­tio­nal Court, which will make the trans­fer of cor­po­rate as­sets si­gni­fi­cantly more ex­pen­sive in the fu­ture. Even though the de­ci­sion of the Ger­man Con­sti­tu­tio­nal Court is not ex­pec­ted un­til the au­tumn of 2014, suc­ces­sion plan­ning should start early so that there is plenty of time for it.

There are many as­pects to con­sider—from brin­ging in the suc­ces­sor to pro­vi­ding in­come to the trans­fer­ring ow­ner af­ter re­ti­re­ment. All the po­ten­tial struc­tures that can be used to ac­com­plish these goals should be con­side­red. This will re­quire a great deal of care. Just as in cor­po­rate re­struc­tu­rings, the re­co­gni­tion of un­rea­li­zed gains, which are sub­ject to in­come tax, must be avo­ided. A split in ope­ra­ti­ons that would be ended if only the ope­ra­ting part­nership is trans­fer­red to the suc­ces­sor can turn out to be a pit­fall in the case of part­nerships. The re­sult would be the re­co­gni­tion of hid­den re­ser­ves in the eco­no­mic as­sets held by the ow­ning part­nership (e.g. in the plants and ad­mi­nis­tra­tive buil­dings lea­sed to the ope­ra­ting part­nership), and in the in­te­rest in the ope­ra­ting part­nership that is part of the ope­ra­ting as­sets of the ow­ning part­nership when the busi­ness is split up. Si­mi­larly, ca­pi­tal gains could be im­me­dia­tely ta­xable if eco­no­mic as­sets qua­lify as spe­cial ope­ra­ting as­sets, but only the in­te­rest in the part­nership is trans­fer­red to the suc­ces­sor wi­thout the ta­xable spe­cial ope­ra­ting as­sets.

In­stead of trans­fer­ring the ent­ire com­pany to the suc­ces­sor with all rights and ob­li­ga­ti­ons, suc­ces­sion plans tailo­red to the in­di­vi­dual si­tua­tion are of­ten re­ques­ted. For ex­am­ple, if the ow­ner is to con­ti­nue to re­ceive part or all of the com­pany's an­nual in­come du­ring re­ti­re­ment, a life in­te­rest can be agreed with the suc­ces­sor when the com­pany is trans­fer­red. In this agree­ment, the life in­te­rest can be ba­lan­ced such that the trans­feror's re­ti­re­ment is se­cu­red, but any in­come in ex­cess of his re­ti­re­ment needs re­mains with the trans­fe­ree and thus will not be sub­ject to in­heri­tance tax at a la­ter point.

If the suc­ces­sor is to be brought into the com­pany over the course of time, then only part of it could be trans­fer­red, with the trans­feror re­tai­ning cer­tain vo­ting rights.

In or­der to avoid an ad­di­tio­nal gift, or a gift that oc­curs la­ter un­der worse con­di­ti­ons, a trans­fer to the ow­ner's grand­child­ren could also be con­side­red. This sort of "ge­ne­ra­tion skip­ping" ma­kes it pos­si­ble to in­clude the grand­child­ren in suc­ces­sion plan­ning un­der the cur­rently ap­plica­ble in­heri­tance tax re­lief. Howe­ver, if the grand­child­ren are still mi­nors, a ge­ne­ra­tion-skip­ping plan should be con­side­red very care­fully due to the re­qui­red par­ti­ci­pa­tion of any spe­cial guar­di­ans and the fa­mily court.

Fi­nally, it is pos­si­ble (and fre­quently done in prac­tice) to make the gift sub­ject to re­vo­ca­tion in or­der to avoid cer­tain si­tua­ti­ons, such as where the donee pre­de­cea­ses the do­nor. If the com­pany is trans­fer­red back to the ow­ner be­cause the ow­ner re­ser­ved the right of re­vo­ca­tion, the ori­gi­nal gift will be un­wound from a tax stand­point, and the gift tax in­cur­red will be re­fun­ded. Howe­ver, re­vo­ca­tion clau­ses should be used care­fully be­cause over­re­aching re­vo­ca­tion rights could jeo­par­dize the tax re­co­gni­tion of the as­set trans­fer.

The struc­tu­ring pos­si­bi­li­ties de­scri­bed briefly here by way of ex­am­ple show that for op­ti­mal tax struc­tu­ring and a le­gal, ba­lan­ced ar­ran­ge­ment of a cor­po­rate suc­ces­sion, not only tax ex­per­tise, but also com­pre­hen­sive le­gal know­ledge and ex­pe­ri­ence is re­qui­red. Suf­fi­ci­ent time is also a de­ci­ding fac­tor in suc­cess­ful suc­ces­sion plan­ning.