Usufruct of Company Shares in Germany

Usufruct can be utilized in multiple ways. It can control income for income tax purposes and optimize potential tax burdens from an inheritance/gift tax perspective. It's not only an anticipated succession tool but can also effectively serve as a testamentary instrument, such as transferring assets to children while ensuring financial security for the surviving partner.

A well-planned usufruct arrangement allows children to participate in the company's profits at an early stage. This can lower the entrepreneur's taxable income and shift it to the children, who often have no other income.

Business assets generally benefit from substantial gift and inheritance tax advantages. So, why consider implementing a usufruct arrangement early?

Transferring assets to the next generation early, with the reservation of usufruct, lets the asset increase occur within the next generation's sphere. This eliminates the need for a later transfer, potentially subject to gift or inheritance tax. If the entrepreneur retains control, they can ensure that the business assets' preferential treatment is met, prevent business jeopardy due to the next generation's carelessness, and gradually introduce the next generation to entrepreneurship.

The right usufruct offers a high level of flexibility, catering to the entrepreneur's specific wishes regarding asset succession and control.

Another crucial aspect is the so-called harmful administrative assets (e.g., shares and cash holdings), which are only minimally favored for inheritance and gift tax purposes but often constitute a significant part of the company value. As usufruct is deducted from the company value when calculating inheritance or gift tax, the tax assessment basis and thus the progressive tax rate can often be significantly reduced by structuring the usufruct. Additionally, the tax-free allowances can be utilized multiple times by transferring the company early.

It is strongly advised to grant a usufructuary right to asset management companies that do not engage in any original commercial activity. This recommendation applies, for instance, to the “cash” or “piggy bank” limited liability companies that were prevalent in the past and still exist in some instances today, or purely asset-managing real estate pool family companies, as they generally consist mainly of non-favored administrative assets.