CORPORATE & TAX Inheritance tax / estate planning / business succession

Tax privileges for business assets

Sections 13a – 13c of the Inheritance Tax Act (ErbStG) grant privileges for acquiring or transferring business assets. These shares in corporations and agricultural and forestry businesses may ensure these assets are transferred tax-exempt. The individual requirements for this are very complex and multi-layered.

The guiding principle in inheritance tax law is taxation at fair value. If exceptions to this guiding principle are to apply, as described above, the privilege requirements must be interpreted strictly. In structuring cases and tax declarations, it is essential to consult the expert knowledge of specialized lawyers or tax advisors to avoid costly surprises.

90% entry test

You can understand the 90% entry test only considering the legislative intention to favor business assets that serve an active entrepreneurial activity. Administrative assets such as cash, receivables, real estate not used by the business itself, or corporation shareholdings of no more than 25% should not be eligible. If the administrative assets in the business amount to at least 90% of the fair market value of the tax-privileged (asset) assets, no preferential treatment should apply overall.

In its decision of 13.09.2023 (case reference II R 49/21), the Federal Fiscal Court (BFH) took a position on the so-called 90% entry test (Section 13b para. 2 sentence 2 ErbStG).

In this case, the plaintiff acquired all shares in a limited liability company (GmbH), which operated a pharmaceutical trading company, from her father as a gift. Initially, the tax office calculated the company’s fair market value at € 550,000, the total fair market value of the financial resources at € 2.5 million, and the debts at € 3.1 million. The tax office deemed the transaction non-beneficial overall, as the 90% entry test had not passed.

No debt offsetting in the entry test to date

Based on the wording of the provision, the interpretation and handling of the tax authorities have so far not permitted the offsetting of debts when determining the administrative assets within the meaning of Section 13b (2) sentence 2 ErbStG. As part of the initial test, the administrative assets’ asset values are compared with the eligible assets’ total value reduced by the debts. For example, you may not deduct debt items when determining financial assets (e.g., business assets, monetary receivables, trade receivables). Trade receivables, in particular, are thus effectively treated in the same way as private assets. Companies with high levels of trade payables (such as trading companies) may find themselves in dire straits as it will be disproportionately tricky or impossible to achieve the privileged treatment. The legislative objective of protecting productive companies needs to be revised.

New: Debt offsetting for financial resources of trading companies

The Federal Fiscal Court has now ruled in the appeal mentioned above that in the case of trading companies whose eligible assets also consist of financial resources, among other things, and whose primary purpose is commercial, the debts incurred for business purposes are to be deducted from the financial resources as part of the 90% entry test. According to the wording of the standard, this interpretation is not required. The BFH results from a systematic, teleological, historical, and constitutional standard interpretation. In particular, the randomly occurring relationships between financial resources and debts in commercial enterprises and the case-by-case effect of Section 13b para. 2 sentence 2 ErbStG have prompted the BFH to limit the interpretation of the provision by the tax authorities on this point.

Impact on consulting practice

This decision is helpful in individual cases so that heirs or transferees of trading companies can undoubtedly rely on it. Of course, whether the BFH’s restrictive interpretation can also be extended to other corporate constellations remains questionable. The need to protect active business units and the often random composition of financial resources and debt relationships certainly does not only apply to trading companies.

Nevertheless, this case law can only be used with caution in structuring cases, even if the reasons for the ruling provide a reasonable basis for argumentation in disputes. The reaction of the tax authorities remains to be seen.