Inheritance tax: New development regarding the 90% management assets test
Inheritance tax: New development regarding the 90% management assets test
Following the groundbreaking ruling of the Bundesfinanzhof (BFH - German Federal Fiscal Court) on the 90% management assets test pursuant to Section 13b para. 2 sentence 2 ErbStG in September 2023, the tax authorities have now implemented favorable consequences for taxpayers.
90% management assets test
If business assets are transferred by way of a gift or as part of an inheritance, tax exemptions pursuant to Section 13a et seq. of the German Inheritance Tax Act (ErbStG - Erbschaftsteuergesetz) may apply. However, Section 13b (2) sentence 2 ErbStG excludes eligible business assets within the meaning of Section 13b (1) ErbStG from the benefits if the gross administrative assets within the meaning of Section 13b (4) ErbStG before debt settlement amount to at least 90% of the fair market value of the eligible assets. Consequently, when transferring companies that naturally have a high level of financial resources, there is always a risk of failing this so-called “entry test”. Then the inheritance and gift tax benefits for business assets are completely denied (so-called “guillotine effect”).
The regulation was incorporated into the law to prevent the co-benefiting of excessive administrative assets and thus abusive tax structuring.
Previous interpretation of the law by the tax authorities
With the 2019 inheritance tax guidelines, the tax authorities had created a comprehensive catalog according to which the business assets listed there are to be considered as harmful for the purpose of determining the 90% management assets test. However, a deduction of debts to offset the management assets was not permitted. This meant that tax exemptions were not granted for numerous transfers of business assets that should have been exempt from inheritance tax in keeping with the purpose of the inheritance tax law. This particularly affected service and trading companies that have extensive financial resources due to their activities.
BFH negates the legal opinion of the tax authorities
Nevertheless, according to the ruling of the BFH dated 13 September 2023 (Ref.: II R 49/21), § 13b (2) sentence 2 ErbStG is to be interpreted to the effect that in the case of commercial enterprises whose assets eligible for preferential treatment consist of financial resources and whose main purpose is to engage in commercial activities, the operationally incurred debts must be deducted from the financial resources for the 90% management assets test enshrined therein. However, the BFH had based its ruling exclusively on commercial companies, so it was unclear whether this ruling would also have a positive impact on other companies.
Change in the legal opinion of the tax authorities
With identical state decrees dated 19 June 2024, the tax authorities have now adopted this case law and allowed a deduction of debts, provided that the company is a company whose main purpose is a commercial activity pursuant to Section 15 (1) sentence 1 of the German Income Tax Act (EStG- Einkommensteuergesetz). A restriction to trading companies was therefore not made.
Looking ahead
Overall, the ruling of the Federal Fiscal Court of 13 September 2023 and the state decrees of the tax authorities based on this ruling are certainly to be welcomed, but key aspects remain unresolved. For example, the question of which criteria can be used to assess the main purpose of a business in the case of mixed activities in a legally secure manner. Furthermore, there are no clear guidelines on how to make a decision on the main purpose in group structures if the individual companies pursue different activities. Neither the ruling of the Federal Fiscal Court nor the state decrees address the practically important question of how the term “business-related debts” is to be understood, in particular whether this can also include liabilities of the special business assets of partnerships.
Hopes remain that the tax authorities will provide reliable criteria for these central questions in the near future. We will therefore keep an eye on further developments for you.