BFH clarifies the definition of employee for business asset tax relief
The Bundesfinanzhof (BFH, Federal Fiscal Court) has ruled that a shareholder-managing director employed full-time by a GmbH who is also its sole shareholder must be counted as an employee until his death within the meaning of § 13a Abs. 1 Satz 4 of the Erbschaftsteuer- und Schenkungsteuergesetz (German Inheritance and Gift Tax Act), as amended by the Wachstumsbeschleunigungsgesetz of 22 December 2009 (ErbStG a.F.). Part-time employees must likewise be counted on a headcount basis when determining the number of employees (BFH, judgment of 17 June 2026 – II R 34/23 (case no.)).
Payroll rule under former inheritance tax law
§ 13a Abs. 1 ErbStG a.F. allowed extensive tax relief for business assets that, in the present case, passed by inheritance. As a general rule, this required the business to be continued for five years and a cumulative payroll of 400 per cent to be achieved within that period.
Under § 13a Abs. 1 Satz 4 ErbStG a.F., the payroll rule did not apply, among other circumstances, if the business had no more than 20 employees. The tax assessment therefore depended to a significant extent on which individuals had to be included in the employee headcount.
Dispute over the number of employees
Staffing structure of the GmbH
Until his death, the deceased was the employed managing director and sole shareholder of a GmbH. The company also employed:
- 18 other full-time employees.
- Two part-time cleaners.
The heirs argued that the transferred business assets should qualify for tax relief even without compliance with the payroll rule. In their view, the GmbH had no more than 20 employees.
Differing views on the counting method
According to the heirs, the deceased himself should not have been included in the employee headcount. They further argued that the two part-time employees should either not be counted at all or should be counted only on a pro rata basis.
By contrast, the Finanzamt considered the GmbH to have had 21 employees on the date of the deceased’s death and thus at the relevant time of taxation. The tax authority relied on the tax audit report dated 2 August 2019. According to that report, 21 employees within the meaning of § 1 Abs. 1 Satz 1 of the Lohnsteuer-Durchführungsverordnung (German Wage Tax Implementing Regulation) were employed at that time.
Subject matter of the court proceedings
Separate determination before the Finanzgericht Münster
Before the Finanzgericht Münster (Münster Fiscal Court), the dispute concerned a separate determination. The claimants argued that neither the number of employees nor the initial payroll should be determined because the threshold of 20 employees had not been exceeded.
The lower court was the Finanzgericht Münster in case 3 K 2466/21 F (case no.). In the subsequent appeal on points of law, II R 34/23, the BFH had to clarify whether the deceased and marginally employed workers had to be included when determining the number of employees under § 13a Abs. 1 Satz 4 ErbStG a.F.
Business-related interpretation of the term “employee”
Focus on the position
The BFH interprets the term “employee” within the meaning of § 13a Abs. 1 Satz 4 ErbStG a.F. by reference to the business. The purpose of the relief provision then in force was to preserve jobs in the abstract.
Accordingly, an individual must be counted as an employee if, viewed independently of their personal identity, they hold a position within the business at the relevant determination date that is intended to be preserved. The decisive factor is therefore the position existing within the company.
Shareholder-managing director remains employed until death
Under civil law, the deceased’s employment relationship continued until his death and ended only as a result of that event. Until then, the employment relationship remained valid.
According to the BFH’s judgment, the deceased therefore formed part of the relevant employee headcount. His status as sole shareholder and managing director did not mean that his position had to be disregarded when applying § 13a Abs. 1 Satz 4 ErbStG a.F.
Part-time employees are counted on a headcount basis
According to the BFH, the number of employees must be determined based on the number of individuals rather than their respective working hours. Each part-time employee must therefore be counted as one employee, just like each full-time employee.
This counting method reflects the purpose of § 13a ErbStG a.F. The preservation of jobs pursued through the tax relief must be taken into account under the same conditions for both full-time and part-time positions. At the same time, determining employee numbers on a headcount basis simplifies administrative practice.
Significance of the judgment beyond the former law
The judgment concerns § 13a Abs. 1 ErbStG a.F. and therefore a provision that is no longer in force in this version. Nevertheless, the BFH has answered questions concerning the classification and counting of employees that had remained unresolved for a considerable period.
The findings on the employee status of an employed shareholder-managing director and on the treatment of part-time employees may also be relevant beyond the specific dispute when assessing the current legal position.
Advice on inheritance tax matters
The transfer of business assets may depend on requirements whose tax treatment is significantly influenced by the number of employees, payroll and continued operation of the business. MTR Legal Rechtsanwälte advises companies, investors and high-net-worth individuals on related matters; further information is available under tax law advice.
