German Ministers Fail To Agree On Inheritance Tax Reforms

by Ulrika Lomas, Tax-News.com, Brussels

05 November 2008

Despite a fast-approaching deadline to ratify the reform of the German inheritance tax, ministers again emerged from intensive talks having failed to reach a consensus on the long-disputed issue.

With all sides remaining seemingly steadfast, and no breakthrough in sight, the government’s intention to implement the reforms from January 1, 2009, appears greatly jeopardized.

In accordance with the stipulations of the Federal Constitutional Court, the amendments to the inheritance tax must be agreed, and the proposals brought before Parliament, by the end of this year, or the reform collapses.

Although the key points of the new law have already been established, a few critical issues remain outstanding.

The crux of the dispute rests on the degree to which inherited property, destined for own use, should remain tax free. While the Christian Social Union (CSU) and Christian Democratic Union of Germany (CDU) are calling for further tax allowances on expensive inherited corporate and residential property, the Social Democratic Party (SPD), lead by Peter Struck, is fiercely rejecting the proposals.

Demands championed by CSU Minister and Chairman Horst Seehofer include granting a special tax allowance of EUR1.5m per spouse or child to property designed for family residence. In addition to this, the CSU is insisting on permitting significantly higher tax-free assets, bequeathed to children and spouses, seeking to raise the child tax allowance from EUR400,000 to EUR600,000 and spouse allowance from EUR500,000 to EUR1m.

According to Struck, however, it is imperative that the EUR4bn inheritance and gift tax revenue is achieved annually in order to contribute to basic community costs, including education. Income derived from inheritance tax levied on large assets is, therefore, vital, he maintains.

Regarding the planned tax concessions for those inheriting a business or company, the Union called for an amendment to the current reform, presenting two preferred initiatives. The first proposal is that an 85% tax rebate should be upheld if the firm is continued for a period of seven years. Alternatively, if the company is maintained for ten years, the asset should be inherited tax-free. The draft reform stipulates that inheritance of a business or company will remain tax free provided that jobs are held open for a period of ten years and that the company capital is not withdrawn for 15 years.

Despite these pivotal concerns, however, both the SPD and CSU remained convinced that an agreement could be reached this week, thereby enabling the reform to enter into force on January 1, 2009, as intended

Negotiations are set to continue on Thursday.

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