Federal Fiscal Court Eases 90% Threshold Test – Case No.: II R 49/21
For family businesses and medium-sized companies, the question of future leadership often arises, and arranging business succession can be challenging. There are generally two options: selling the business or passing it on within the family.
Especially in family businesses, passing the company to the next generation is often desired. However, various difficulties must be overcome. In particular, both inheritance and tax law aspects need to be considered during family business succession. One significant hurdle is the inheritance tax, which can burden the transfer of the business, according to the law firm MTR Legal Rechtsanwälte, which provides advice on inheritance law and business succession.
Inheritance Tax in Business Succession
It is encouraging that the Federal Fiscal Court (BFH) has lowered the barriers posed by inheritance tax in business succession with its ruling on September 13, 2023 (Case No.: II R 49/21).
Generally, business assets are privileged in terms of inheritance tax compared to private assets. Even after the 2016 inheritance tax reform, heirs of businesses can still be largely exempt. However, this is subject to strict conditions, such as maintaining jobs. Furthermore, only active business assets and not administrative assets should benefit from the exemptions. Companies can only benefit from the inheritance tax exemption if their administrative assets do not exceed 90 percent of the total company assets.
BFH Lowers Hurdles
The BFH has eased this so-called 90% threshold test for commercial enterprises with its ruling on September 13, 2023, deciding that business-related debts should be deducted from financial assets. Previously, administrative assets were compared to the total value of the company as a gross value, without considering liabilities.
In the underlying case, the plaintiff received shares in a GmbH from her father as a gift. The tax office valued the GmbH shares at approximately 556,000 euros. Based on this value, minus costs and fees of around 11,000 euros and plus a previous gift to the plaintiff of 200,000 euros, the tax office determined the gift tax considering the exemption. The tax office stated that according to § 13b Abs. 2 Satz 2 ErbStG, which includes the 90% threshold test, no tax exemption could be granted.
The plaintiff’s appeal for standard exemption was rejected by the tax office. However, the fiscal court upheld the subsequent lawsuit, deciding that the gift of the GmbH shares was 85 percent tax-free as privileged assets under § 13a Abs. 1 ErbStG. The 90% threshold test did not preclude this exemption, the court ruled.
Revision Unsuccessful
The tax office appealed against the fiscal court’s decision. During the revision process, it issued an amended gift tax assessment following an external audit, setting the value of the GmbH shares at approximately 1.2 million euros. The tax office argued in the revision process that not applying the 90% threshold test when the company also engages in genuine commercial activity would lead to an unintended benefit by the legislator.
The appeal was unsuccessful. The BFH confirmed the fiscal court’s decision that the GmbH shares were privileged assets largely exempt from tax. The conditions for the 90% threshold test did not apply, according to the highest financial judges.
No Gift Tax Payable
Acquisition of privileged assets remains generally 85 percent tax-free if the assets do not exceed 26 million euros. The remaining value of the assets is disregarded if it does not exceed 150,000 euros, the BFH explained.
The 90% threshold test (§ 13b Abs. 2 Satz 2 ErbStG) should be interpreted such that for commercial enterprises, whose eligible assets consist of financial means and whose main purpose is a commercial activity, business-related debts must be deducted, the BFH emphasized. Therefore, the plaintiff does not have to pay gift tax.
Despite the BFH ruling, the 90% threshold test remains a hurdle in business succession. MTR Legal Rechtsanwälte advises on business succession and other inheritance law matters.
Feel free to contact us.
