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Tax Advice

Whither inheritance tax?

The Fe­deral Tax Court’s de­ci­sion of Sep­tem­ber 27, 2012 (case no. II R 9/11) re­ne­wed old doubts about the con­sti­tu­tio­na­lity of the cur­rent in­heri­tance tax law and cal­led on the Fe­deral Con­sti­tu­tio­nal Court to ex­amine whe­ther the pre­fe­ren­tial tax tre­at­ment gi­ven to in­heri­ted busi­ness as­sets pas­ses con­sti­tu­tio­nal mus­ter.

The Fe­deral Tax Court’s de­ci­sion of Sep­tem­ber 27, 2012 (case no. II R 9/11) re­ne­wed old doubts about the con­sti­tu­tio­na­lity of the cur­rent in­heri­tance tax law and cal­led on the Fe­deral Con­sti­tu­tio­nal Court to ex­amine whe­ther the pre­fe­ren­tial tax tre­at­ment gi­ven to in­heri­ted busi­ness as­sets pas­ses con­sti­tu­tio­nal mus­ter. The Tax Court ar­gued that the pre­fe­ren­tial tre­at­ment of busi­ness as­sets, at least in the form that has been in force since Ja­nu­ary 1, 2009, is not suf­fi­ci­ently ju­sti­fied by pu­blic po­licy con­side­ra­ti­ons. The Court does not view it as pro­ven that such tre­at­ment helps en­sure the con­ti­nuity of busi­nes­ses or pro­tect jobs. Mo­re­over, it be­lie­ves that the tax ex­emp­ti­ons have been un­con­sti­tu­tio­nally ex­ten­ded, be­cause there are le­gal ways for as­sets that are not re­qui­red for busi­ness ope­ra­ti­ons to fit wi­thin the mea­ning of the clau­ses in ques­tion.

The lat­ter is­sue was pro­bably ad­dres­sed by the amend­ment of in­heri­tance tax ru­les by the Mu­tual As­sis­tance Di­rec­tive Im­ple­men­ta­tion Act [Amts­hil­fe­richt­li­nie-Um­set­zungs­ge­setz], which pro­vi­des that “Cash GmbH's” are not en­tit­led to pre­fe­ren­tial tre­at­ment for in­heri­tance tax pur­po­ses. If cash re­sour­ces mi­nus debts ex­ceed 20% of to­tal busi­ness as­sets, they are con­side­red harm­ful non­busi­ness as­sets and can thus make the ex­emp­tion ru­les in­ap­plica­ble.

But this so­lu­tion throws the baby out with the ba­thwa­ter. These new ru­les not only eli­mi­nate the pre­fe­ren­tial tre­at­ment of Cash GmbH's, but they also have dras­tic in­heri­tance tax con­se­quen­ces for me­dium-si­zed com­pa­nies.

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