Learn how retroactive modifications in the valuation rules for all transfers of business took effect 1 January 2016 for German inheritance and gift tax could affect you.
In the case of a transfer of shares for gifts or inheritances in Germany or for German based shareholders there is a general tax duty. Consequently the value of the business assets must be regularly determined for tax assessment purposes. This process is carried out in accordance with the tax provisions of the Valuation Act on the basis of the company's average tax profit over the last three years, less a flat-rate tax burden of 30% and multiplied by a capitalization factor, dependent on the capital market interest rate. This capitalization factor previously amounted to 17.86 and led in many cases to an almost unrealistically high valuation of company shares. In the course of the 2016 inheritance tax reform, the capitalization factor for the simplified capitalized earnings value method was reduced and fixed to 13.75 retroactively and came into effect 1 January 2016. Thereby, the company value determined in accordance with this ‘so-called’ simplified capitalized earnings value method falls by about 23%.
However, the fact that the inheritance tax reform has only been applicable since 1 July 2016 results in a period during the first half of 2016 where the existing inheritance tax law (including the preferential treatment of business assets pursuant to the 13a, 13b German Inheritance Tax Act old edition (ErbStG a. F.)) was still applicable along with the reduced capitalization factor (in accordance with the German Inheritance Tax Act revised edition (ErbStG n.F.)). Any party who is affected should pay attention that the new reduced value is considered in the tax assessment. If any tax is payable on the transfer, this reduced value serves as basis of assessment.
With regard to transfers of business carried out between 1 January 2016 and 30 June 2016, there is also a second implication. The so-called administrative assets quota is also crucial to determine the extent of the preferential treatment. If the calculated quota is higher than 50 percent, the transfer is not treated preferentially and if it is higher than 10 percent, the so-called optional preferential treatment involving 100 percent exemption is no longer applicable. The administrative assets quota in this case falls in proportion to the lower company value, therefore it should be verified whether or not this retroactive amendment makes the administrative assets quota rise above the critical limits of 10 percent or 50 percent as defined in the former Inheritance Tax Act. Transfers where the administrative assets quota was between 7.7% and 10% or between 38.5% and 50% due to the applicable (higher) capitalization factor are rare.
There are several strategies to return, as a result, to the – fiscally more favorable – situation before the retroactive amendment. For example, an expert company valuation (e.g. in accordance with the German valuation standard IDW S 1) can provide evidence that the existing targets were met because the de facto company value is higher than the one calculated, on the basis of the simplified capitalized earnings value method.
Contact your local advisor for more information on these changes and how they may affect your business.