Tax Exemption for Business Assets in Germany

Which business assets can be transferred tax-free?

What are administrative assets?

Administrative assets include those assets of a company that formally form part of the business assets for tax purposes, but are only of secondary importance or of no importance at all for the actual business activity. In Section 13b para. 4 ErbStG, the legislator specifically defines which assets are to be classified as administrative assets:

• Land rented or leased to third parties (with the exception of the leasing of an entire business),
• Minority interests in corporations of less than 25 percent of the share capital, provided that trading in such shares is not the main purpose of the company,
• luxury goods such as art collections, vintage cars and yachts,
• securities and comparable monetary claims (exception: financial services companies); this also includes, for example, receivables from customers.

The legislator takes a particularly critical view of so-called young financial assets - i.e. deposits and withdrawals made within two years prior to the transfer of the company. These are generally classified as administrative assets. In practice, these include, in particular, cash deposits recently made by the shareholders.

Can administrative assets be transferred tax-free?

Administrative assets can actually be transferred tax-free under certain conditions. The decisive factor here is the share of administrative assets in the company's total assets:

• If the net value of the administrative assets is less than 10 percent of the total business assets, a full tax exemption for the entire transferred business assets can be considered (option exemption).
• If the proportion of administrative assets is above this threshold but less than 90 percent of the total assets, a partial tax exemption is possible (standard exemption). In this case, the net value of the administrative assets is deducted from the business assets eligible for tax relief, whereby a harmless portion of the administrative assets is taken into account.
• If the administrative assets exceed the 90 percent threshold, the tax relief does not apply in full.

To calculate the net value of the administrative assets, the corresponding debts are deducted from the fair market value of the total administrative assets. When examining the 10 percent limit, “young financial resources” and “young administrative assets” (assets that have belonged to the business for less than two years) are not taken into account. The tax treatment of administrative assets clearly shows the legislative intention: only assets that are actually necessary for the business should benefit in full from the tax concessions.

The preferential treatment only applies if certain types of assets are present (such as agricultural and forestry assets, business assets or qualifying shares in corporations) and the proportion of non-operating administrative assets does not exceed certain limits. A commercial enterprise (e.g. sole proprietorship) is also eligible if a permanent establishment is maintained outside Germany but within the EU. In the case of corporations, the shareholder must hold a stake of at least 25 percent and the registered office or management must be located in Germany or the EU.

Standard exemption vs. option exemption

After determining the preferential business assets in accordance with Section 13b ErbStG, inheritance tax law offers two options for tax exemption:

1. Standard exemption (85 percent tax-free):

• This applies automatically to favored assets under EUR 26 million.
• The remaining 15 percent is generally subject to taxation.
• Depending on the individual asset composition, a tax-free transfer may be possible despite the existence of harmful administrative assets, e.g. due to applicable allowances. However, this must be examined on a case-by-case basis.

2. Option exemption (100 percent tax-free):

• This can be chosen if the administrative assets account for less than 20 percent of the total assets eligible for preferential treatment.
• It enables complete tax exemption.

There are other points that must also be fulfilled after the transfer (e.g. retention periods, payroll regulations) in order to enable a tax-privileged transfer. In practice, this can primarily affect entrepreneurs who are aiming for a prompt sale after the transfer or are planning redundancies.

There are two alternative options for larger asset transfers over EUR 26 million:

1. Gradual tax relief: The tax relief is gradually reduced by 1 percent for every EUR 750,000 above the limit.
2. Testing the need for tax relief: Possibility of tax remission if the acquirer is demonstrably unable to pay the tax.

The acquirer must choose between the diminishing relief discount and the needs test - a combination of both concessions is not possible.