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German IHT Reforms Pass Key Obstacle

by Ulrika Lomas, Tax-News.com, Brussels

27 September 2016


The mediation committee of the lower and upper houses of Germany's Parliament have agreed to changes to the country's inheritance tax laws, which are required by a Constitutional Court ruling.

Under Germany's 2009 inheritance tax law, heirs of assets from companies with more than twenty employees are exempt from inheritance tax provided that the business remains operational for at least ten years and that jobs are maintained. It is a system that many argue helps Germany to maintain high levels of employment and enables small and medium-sized businesses to use assets for growth rather than for paying potentially large inheritance tax bills. Inheritance tax rates in Germany can be as high as 43 percent, depending on the relationship between the deceased and the heir.

However, others argue that these tax breaks are unfair as they benefit mainly wealthy individuals, while also helping to concentrate large amounts of wealth among a relatively small number of families.

In 2014, Germany's Constitutional Court ruled that existing rules breach the principle of fiscal equality, and ordered that the legislation be changed by mid-2016.

After two years of fraught negotiations on the matter, Germany's main political partied finally reached a compromise in June, which has now been backed by the parliamentary mediation committee.

The changes will mean that inheritance tax exemptions and reductions will be abolished on inheritances exceeding EUR90m (USD101m). In addition, inheritances worth between EUR26m and EUR90m will be subject to more stringent criteria in order to claim tax reductions. A total exemption from inheritance tax will apply in most other cases, but only if the company operates for a minimum of seven years and maintains previous employment levels.

Companies employing five staff or fewer will automatically be exempt from inheritance tax without restriction, down from 20 workers under existing rules.

The agreed changes are expected apply from July 1, 2016, although they need to be approved by both houses of Parliament before they can be given legal force. The amendments are expected to raise an additional EUR235m in tax revenue.

TAGS: individuals | inheritance tax | tax | business | law | employees | legislation | tax rates | Germany | tax breaks

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