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German family businesses could face “tremendous difficulties” under new tax ruling

Germany’s highest court has this morning ruled a 2009 law that provides tax breaks and exceptions on inheritance for the country’s family businesses illegal and unconstitutional.

The Federal Constitutional Court said the law violated the principle of fair taxation as it provides special treatment to some companies.

But family business advocates say the new ruling could unfairly disadvantage firms that are family owned, compared to competitors that don't face inheritance tax bills.

Family-owned companies account for 92% of German corporations, one of the highest levels in the world, and employ over half of the country's workforce and generate more than half of the country’s economic output.

The court gave the German government until June 2016 to draft and pass new rules to allow small and medium-sized companies tax breaks "to secure their existence and preserve jobs", while still ensuring individuals and businesses are treated equally. Until then the existing rules will apply, giving families time to resolve inheritance issues under the old regime.

Professor Rainer Kirchdörfer, executive board member at the Foundation for Family Businesses said that today’s court ruling has the potential to cause “tremendous difficulties” for larger German family enterprises.

“On principle, an exemption from the inheritance tax is still possible. But the constitutional court wants to have the exemption need-based or may ask lawmakers to set an upper limit for the size of companies eligible for exemption.

“A need-based exemption from the inheritance tax would be problematic and bureaucratic because family companies would need to prove they cannot pay the inheritance tax in cash.

“Plus, there would be a substantial risk for any business, if financing banks or competitors find out that a company is lacking the liquidity to pay the tax.”

The court noted that only €4.3 billion of inheritance tax was paid in 2012 while exemptions to the tune of nearly €40 billion were granted.

In a nuanced ruling, the judges stressed that it was in principle legitimate to give heirs of family-run companies a degree of shelter from inheritance tax. Court vice president Ferdinand Kirchhof said: "The court considers it in general to be justified that lawmakers offer some protection to family-run companies when they are passed on to the next generation so that their future is not put in jeopardy from a fiscal viewpoint".

But Kirchdörfer believed lawmakers would face huge challenges implementing the court’s decision. “We ask policymakers to use any leeway for the benefit of bigger family-owned enterprises because those companies face strong competition from foreign firms or non-family owned public companies which are affected to a much lesser degree – or even not at all – from the inheritance tax.”

According to the BVMW industry association, more than 130,000 German family businesses with 1.6 million employees are set to change hands by 2018.

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