ZEW President Franz on the Issue of “Inheritance Tax”


This article appeared in the December 2005 edition of the ZEWnews.

Inheritance Tax

Members of the public have expressed their surprise that the German Council of Economic Experts opposes draft legislation on the reform of inheritance tax in its most recent annual report. How does this match with the tax relief for companies which is otherwise usually pushed for?

First, it has to be made clear that the Council of Experts speaks strongly in favour of a reform on inheritance tax. It does, however, propose that the reform on inheritance tax should be integrated into a more general reform on corporate taxation. For that reason, the Council of Experts has presented detailed suggestions regarding a dual income tax in its annual report, which is due to be defined more precisely and concretely at the start of next year in a separate expert’s report by the Council. The equal tax treatment of all investment income and forms of capital investment, which are to be striven for within the framework of the concept of corporation taxation, equally applies to inheritance taxation. Namely to the inheritance tax valuation of business assets and shares in corporations. Of course, this equal tax treatment could happen at a tax rate of zero per cent, which means that inheritance tax would be waived. Although this is neither worthwhile nor necessary, even from the perspective of safeguarding businesses and jobs.

The previous draft laws include a deferral of the inheritance tax payable on “productively” used assets over a period of ten years in the form that the tax liability is to expire in ten annual instalments if business is continued. The deferral of the inheritance tax liability is terminated in the event of business closure or sale within the ten-year period following the accrual of the inheritance as well as if the “productive” business assets are transferred to “non-productive” business assets.

Currently, there is already the opportunity to defer payment of inheritance tax on business assets as well as agricultural assets and forestry by up to ten years (!) interest-free (!) as long as this is necessary for safeguarding the business. If the business faces an existential threat then it is even legally entitled to this deferral of payment. However, by all accounts these deferral opportunities are hardly being put to use. This ought to provoke some thought.

The difference in “productive” and “non-productive” business assets are not economically viable. “Non-productive” assets in the form of financial securities, shares in corporations or financial claims on credit institutions can very much lead to the creation or safeguarding of jobs. Admittedly not in inherited businesses, but those which received indirect investment. And why should it be that an heir to “non-productive” financial assets who creates a business and jobs be faced with a higher tax burden than the direct inheritance of a business?

Even the argument of a threatened relocation to a more inheritance tax-friendly foreign country does not stand up to scrutiny. As research by ZEW shows, with regard to inheritance tax liability Germany ranks in the middle field on an international scale. Moreover, in the case of an unplanned or “accidental” inheritance, the heir cannot avoid incidental inheritance tax by subsequently relocating production abroad. When planning an inheritance in advance, German inheritance tax can only be avoided if the inheritance takes place more than five years after the testator and heirs have moved abroad. Under certain circumstances, a kind of liquidation tax (of hidden reserves) applies in the event of a relocation.

What is certain is that nobody willingly pays tax, so it is understandable that businesses welcome the planned reforms to inheritance tax. However, is there actually any leeway for tax reductions which hardly create any additional jobs? This is exactly what the Council of Experts has wanted to draw attention to.