The German Federal Constitutional Court (BVerfG) is once again reviewing the constitutionality of the Inheritance and Gift Tax Act (ErbStG). In one case (Ref. 1 BvR 804/22), a violation of the principle of equality is being challenged – specifically, the preferential treatment of business assets compared to private assets. The case, which has been pending since 2022, is expected to be decided this year.
There is great uncertainty among advisors and numerous entrepreneurs who, under the current legal situation, still own so-called preferential business assets within the meaning of German inheritance tax law. It is unclear what impact a decision by the BVerfG could have on the currently far-reaching preferential treatment standards for business assets under Sections 13a–13c, 28a ErbStG. Predictions as to how the Federal Constitutional Court might rule range from the inadmissibility of the applications or their non-acceptance for a decision to a confirmatory decision in favor of the tax legislator to a finding that the current legal situation is unconstitutional.
New inheritance tax regulations: Possible decisions by the Federal Constitutional Court
If a constitutional complaint against a court decision is upheld, the Federal Constitutional Court generally only overturns the specific court decision (Section 95 (2) BVerfGG). However, it may also declare a decision null and void if it is based on an unconstitutional law (Section 95 (3) sentence 2 BVerfGG). This means that the Federal Constitutional Court could also rule comprehensively on the unconstitutionality of the Inheritance and Gift Tax Act beyond the specific subject matter of the application.
As was the case with the last reviews of inheritance and gift tax in 2006 and 2014, it is rather unlikely that the BVerfG – should it consider the current legal situation to be unconstitutional – will declare the law to be immediately void. It is more likely that the court will declare the law incompatible with the German Constitution and give the legislature the opportunity to enact new legislation, ordering a transition period.
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If the court were to declare the law null and void with immediate effect and the legislature were then to enact a new law with retroactive effect, the question would arise as to whether this constituted genuine or false retroactivity. Genuine retroactivity – i.e., a completely concluded matter within the retroactive period – is generally inadmissible. However, an exception exists if the citizen should have expected such a decision. In the case of a new enactment of the inheritance tax law, this exception could be relevant.
Further pending proceedings on the Inheritance Tax Act before the Federal Constitutional Court
In addition to the aforementioned proceedings, the Federal Constitutional Court is also reviewing the constitutionality of the current Inheritance and Gift Tax Act in other proceedings. Of particular note is an abstract judicial review procedure initiated by the Bavarian state government before the Federal Constitutional Court on June 16, 2023 (Ref. 1 BvF 1/23). The aim of the application is a constitutional review to pave the way for an increase in personal allowances, a reduction in tax rates, and regionalization of inheritance tax. The Federal Constitutional Court could also use these proceedings as an opportunity to rule on the exemption rules for business assets (Sections 13a–13c, Section 28a ErbStG).
Act quickly when transferring business assets!
The current year could lead to significant changes in the area of inheritance and gift tax in Germany. If the Federal Constitutional Court does indeed declare the current law to be unconstitutional, we recommend a prompt transfer of business assets by way of anticipated succession. This is the only way to ensure that the current benefits under Sections 13a–13c, 28a of the German Inheritance Tax Act can be utilized. Of course, this is subject to the condition that the assets in question are “preferential business assets.”
In any case, it is to be feared that the regulations on preferential treatment of business assets will be significantly tightened in the course of a new legal reform – especially with regard to the transfer of so-called large assets (business assets exceeding EUR 26 million).
If you have any questions about current developments and individual structuring options relating to the transfer of business assets, we will be happy to advise you at any time. Contact us – we look forward to providing you with comprehensive support.
