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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.

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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.

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