The German Federal Constitutional Court (Bundesverfassungsgericht) will hold a hearing in the case on the constitutionality of German Inheritance and Gift Tax Act (Erbschaft- und Schenkungsteuergesetz) on 8 July 2014

On 8 July 2014, the Federal Constitutional Court will hold a hearing in the case on the constitutionality of the current Inheritance and Gift Tax Act (IGTA) containing substantial exemptions for the transfer of business assets. Even though it is open how the court will decide, doubts about the constitutionality of the current IGTA are shared widely.

For the third time in 20 years, the IGTA is put to the constitutional test. With the Inheritance Tax Reform Act of 24 December 2004, the legislator largely eliminated unequal evaluation provisions for assets which are transferred by way of succession or donation, as they had been criticized as unconstitutional. However, exemptions were created for business assets in order to exempt in particular company successions (Sections 13a, 13b IGTA). This again raised doubts about the constitutionality of the IGTA. These doubts about the constitutionality of the current IGTA were shared by the Federal Fiscal Court that decided on 27 September 2012 to submit the IGTA to the Federal Constitutional Court for a constitutional review.

The basic reason for the constitutional test is the following: The IGTA in its current version allows the transfer of business assets completely or partly (85%) tax-exempt from inheritance and gift tax under certain conditions. Foreign citizens who are subject to limited inheritance and gift tax liability in Germany only can also benefit from this favorable tax regime.

Recommendation

In view of the potential unconstitutionality of the IGTA business exemptions and potential future restrictions, it is recommendable in many cases – where possible – to transfer business assets before the Federal Constitutional Court will decide. With additional measures, risks can be mitigated.

Dr Frank Tschesche, LL.M., (NYU), Lawyer/Tax Advisor/Attorney-at-law N.Y.
Dr Christoph Schneider, Lawyer/Accredited Specialist in Tax Law