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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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