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German Court Orders Inheritance Tax Overhaul

Germany's Federal Constitutional Court on December 17, 2014, ordered the Government to make changes to a law that grants inheritance tax breaks to family businesses.

The Court said that the current provisions will apply for the time being, but revisions should be made by June 30, 2016.

The Court ruling acknowledged that the legislature has a right to award preferential treatment under the tax code to small- and medium-sized companies managed by their owners to shield them from tax-related liquidity problems which may undermine their existence and the jobs they provide.

However, it said that such preferential treatment is disproportionate when it is applied to large companies as well as small companies without an economic-means test. In such cases, due to the scale of the tax-exempt amounts, the unequal treatment reaches a scope that is no longer compatible with the principle of equal taxation unless a necessity to exempt the acquired company is specifically determined, it said.

Preferential tax treatment should only be granted in cases where an economic means test identifies a serious risk of liquidity problems in the context of taxing a transfer of companies that does not involve payment, the Court said.

Deputy Finance Minister Michael Meister said that the legislature will decide on revisions to the law after careful consideration of the Court judgment.

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