Business Succession: Planning Under the Sword of Damocles of the German High Court Ruling (BVerfG)
The inheritance and gift tax benefits under Sections 13a and 13b of the German Inheritance Tax Act (ErbStG) have for years been among the key tools for tax-optimized business succession. At the same time, ensuring a seamless business succession has become increasingly complex, as these exemption provisions have repeatedly been the subject of constitutional review. Currently, advisors and clients are preparing for an upcoming hearing before the German High Court / Federal Constitutional Court (BVerfG), in which the constitutionality of the business assets exemption is once again to be put to the test.
Against this backdrop, the question arises: How should business owners and business succession planners handle upcoming gifts of company shares if it is foreseeable that a supreme court ruling—and, if applicable, new legislation—will be issued in 2027?
Grandfathering and the Cut-off Date Principle in Business Succession Planning
Inheritance and gift tax is a classic “cut-off date” tax (Section 9(1) of the Inheritance Tax Act (ErbStG)). For inter vivos gifts, the tax becomes due at the time the gift is made (Section 9(1)(2) of the Inheritance and Gift Tax Act). What is decisive is the legal transfer of assets, not the prior contractual agreement.
In the context of potential legislative changes, two questions regularly arise:
- Which acquisitions are protected by “grandfathering” provisions if the Federal Constitutional Court declares the current preferential treatment provisions to be unconstitutional?
- Which date is relevant for determining the acquisition—the date of the gift or the date the tax assessment becomes final?
From today’s perspective, there are strong arguments for linking the protection of existing rights in business succession cases to the substantive finality of the inheritance or gift tax. This is because numerous election rights (e.g., an application for an optional exemption with a 100% exemption deduction) must be exercised before the assessment becomes final. A retroactive “reversal” of tax-exempt acquisitions appears to be significantly more problematic from the perspectives of legal policy and constitutional law once a final tax assessment has already been issued.
Implications for planning practice: Gifts made before a decision by the Federal Constitutional Court are not automatically “secure.” The decisive factor is whether a final tax assessment has been issued by the time any legislative change takes effect. It remains to be seen whether and to what extent the tax authorities will continue to issue assessments at all until the BVerfG renders its decision, or whether the legislature will enact transitional provisions.
Indirect Transfer of Shares and Exemption of Business Assets
The transfer of GmbH shares as part of an anticipated succession is often embedded in complex structures—such as indirect gifts of shares, financing arrangements, or the involvement of partnerships. To qualify for the benefits under Sections 13a and 13b of the German Inheritance Tax Act (ErbStG), it is not only necessary for the shares to qualify as business assets, but also, and in particular, for the holder to meet the minimum ownership requirement in corporations.
Under Section 13b(1) of the Inheritance Tax Act (ErbStG), shares in corporations are considered part of the exempt estate only if the decedent or donor held a direct interest of more than 25 percent in the par value of the capital at the time the tax liability arose. Case law has expressly clarified that this ownership requirement must also be met by the donor in the case of indirect gifts of shares. A tax exemption under Section 13a of the German Inheritance Tax Act (ErbStG) is ruled out if the donor does not meet the minimum ownership requirement, even if the recipient ultimately receives a stake that formally meets the required threshold.
Thus, indirect arrangements do not “eliminate” the strict requirements for business asset exemption, but rather tighten the requirements for a precise analysis of the ownership status as of the date on which the tax liability arises.
Risk Assessment: Donation of GmbH Shares Prior to the Federal Constitutional Court Ruling
Against this backdrop of constitutional and legislative uncertainty, the inter vivos gift of GmbH shares currently carries latent risks. This applies in particular to situations in which the tax benefits for business assets under Sections 13a et seq. of the Inheritance Tax Act (ErbStG) are decisive and the tax viability of business succession depends on them.
The main risk areas:
- The Federal Constitutional Court may declare the current exemption provisions unconstitutional and require the legislature to enact new regulations with stricter criteria.
- Transitional provisions could be unclear in terms of their nature and scope and, in particular, could limit the protection afforded to acquisitions for which a final assessment has not yet been issued.
- In the case of indirect gifts of shares, it must also be ensured that the donor’s minimum ownership interest exceeds the 25 percent threshold—otherwise, the tax benefit does not apply, regardless of the constitutional debate.
Structural decisions that rely on extensive or complete tax exemptions for business assets should therefore be made with particular caution until the Federal Constitutional Court issues its ruling.
Recovery Rights as a “Lifeline” Under Section 29(1)(1) of the Inheritance Tax Act (ErbStG)
A key tool for protecting against unintended gift tax liabilities is the contractually agreed right of recovery. If a clawback clause is included in the gift agreement—one that takes effect if the expected business asset exemption is not granted—the gift can be rescinded in the event of an emergency.
For tax purposes, § 29(1)(1) of the Inheritance Tax Act (ErbStG) applies here: Gift tax is retroactively waived if the acquisition is nullified due to a right reserved by contract (e.g., retransfer of the shares). This is contingent upon the right of reclamation actually being exercised, thereby rescinding the acquisition in a legal sense.
For notarial practice, this means:
- Claims for reimbursement should be formulated in a clear, unambiguous, and enforceable manner.
- The condition for reclaiming the tax should be linked to the specific tax situation, such as the denial of an exemption under Sections 13a and 13b of the Inheritance Tax Act (ErbStG) or the assessment of a tax amount that is significantly higher than originally calculated.
- Triggering events must be structured in such a way that they are legally valid under civil law and transparent for tax purposes.
Such clauses are not a panacea, but they do represent an important option for taking a proactive approach to structuring arrangements despite uncertainties, without risking irreversible tax burdens.
Structuring Through a GmbH & Co. KG: Income Tax Neutrality in Business Succession
The constitutional debate does not directly affect the income tax aspects of business succession. Nevertheless, the structure is often viable only if both the inheritance and gift tax implications and the income tax implications are coordinated.
Typical elements:
- Contribution of business-use real estate and GmbH shares to one or more GmbH & Co. KGs to ensure that they are treated as business assets.
- Use of a partnership structure to transfer co-partner interests through anticipated succession in a manner that is neutral for income tax purposes.
- Combined with the exemption provisions of the Inheritance Tax Act (ErbStG) to achieve results that are optimized both for income tax purposes (e.g., carrying forward the book value) and for gift tax purposes (favorable treatment of business assets).
In many cases, the establishment and implementation of GmbH & Co. KG structures must be pursued regardless of the current constitutional debate, as they form the basis for the relevant assets to qualify as preferential business assets in the first place and to be transferred without affecting income tax liability.
Recommendations for Business Succession
From a tax and legal advisory perspective, the following guidelines are currently emerging:
- Early analysis of ongoing and planned succession arrangements involving business assets in light of the Federal Constitutional Court hearing and potential legislative changes.
- Determine whether significant acquisitions can be secured by final tax assessment notices pending the Federal Constitutional Court’s decision—and whether the tax authorities will issue assessments in a timely manner in this regard.
- For new gifts of GmbH shares: strict compliance with the minimum ownership percentage requirement for the donor and the other conditions set forth in § 13b of the German Inheritance Tax Act (ErbStG) as of the date the tax becomes due.
- Inclusion of clearly defined rights of recovery in gift agreements to allow for rescission—with retroactive cancellation of the gift tax pursuant to § 29(1)(1) of the Inheritance Tax Act (ErbStG)—in the event that the exemption of business assets is denied.
- Regardless of this: Continue and implement income tax structuring measures (e.g., the formation of GmbH & Co. KGs) that ensure the classification of assets as business assets and the income tax-neutral transferability of the company’s key assets.
Given the uncertainties, it is advisable to coordinate the planned share donations closely with all parties involved in order to align the strategic approach until the Federal Constitutional Court renders its decision and to amend contracts—particularly clawback clauses—accordingly.
You can find another blog post on this topic here.
Sources: s&w Steuerberatungsgesellschaft mbH, Unterberg & Unterberg, Laws on the Internet
Photo: AI-generated
Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute recommendations for action.
