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COVID-19 pandemic: effects on inheritance and gift tax

Marie Christine Waldens Marie Christine Waldens

The current COVID-19 pandemic affects both completed business succession processes and those planned in the near future provided that the tax benefits relating to business assets under sections 13a, 13b Inheritance Tax Act [Erbschaftsteuergesetz - ErbStG] are obtained.

Tax benefits for business assets and shares in corporations as well as agricultural and forestry assets

If the relevant conditions are satisfied, in particular assets that are eligible and pass the 90% test, 85% of the goodwill may be transferred tax-free under the standard exemption; in connection with the optional exemption this may be increased to 100%.

Effects on completed business succession processes

However, these tax benefits are subject to strict conditions: For a period of five years under the standard exemption or seven years under the optional exemption the sale of business assets, excess withdrawals and falling short of wage and salary levels are not permitted. The holding periods of for business successions completed in 2013 or subsequently (optional exemption) or in 2015 or subsequently (standard exemption) are still ongoing. In the current crisis, this may involve the following risks:


The fiscal authorities are of the opinion – which they expressed in the new Inheritance Tax Directives published in December 2019 – that forced sales or even insolvency caused by the current COVID-19 pandemic constitute a breach of the holding requirement. Accordingly, it is irrelevant that a COVID-19 induced insolvency is an inevitable und involuntary cessation of business due to circumstances that are beyond control. The affected acquirer is therefore punished twice.


Restructuring measures which may have become necessary during the pandemic or after overcoming it in order to help the business survive or continue being able to compete may also have an adverse effect on the situation. Restructuring may also constitute a breach of the holding period. It should therefore be checked on a case-by-case basis whether the planned restructuring will be deemed to be a sale or equal to a sale in order to avoid an additional financial burden at the shareholder level caused by back taxes having to be paid.

Observing the wage bill

Another almost inevitable problem which the COVID-19 pandemic entails is a potential breach of the wage bill. In the acute crisis situation, the short-time working benefit frequently replaces the wage loss of the affected employees. Even if the short-time working benefit is counted towards the calculation of the wage bill as payroll expenses of the company, the wage bill will still drops as a consequence of the COVID-19 crisis since the amount of the short-time working benefit is lower than the wage loss. If the economic consequences of the crisis manifest themselves in the form of dismissal, more part-time work or recruitment freezes in the subsequent period, this also adversely affects the minimum wage bill, which may lead to back payments of inheritance or gift tax after the end of the holding period. Here a timely and detailed monitoring of the previously accrued amounts of the wage bill and those still accruing before the final expiry of the holding period may help avoid adverse effects.

Effects on planned business succession processes

The current COVID-19 crisis and its effects should also be taken into account with regard to future transfers of businesses or shares in the event of inheritance or gift.

90% test

The 90% test introduced in the process of the preceding inheritance tax reform is problematic enough in cases of inheritance or gift even without a crisis. Obtaining tax benefits for business assets in the form of standard or optional exemption comes into consideration only if the assets which are not privileged are less than 90% of the business value. The pitfall of this regulation is that administrative assets and in particular the funds are set in proportion to the business value before deducting debts. As the funds also include any receivables of the business operations, e.g. trade receivables, the value to be determined frequently falls short of the 90% limit in normal times. If the business value drops as a consequence of the COVID-19 crisis, the 90% test might therefore not be passed. Independent of the question whether the regulation of the 90% test is constitutional, for which there is reason to doubt, it is necessary to exactly determine the value at least before any planned gifts and it may be advisable to postpone the time of the gift to avoid unpleasant surprises.

"Young" funds

Another aspect is important in this context: Where shareholders provide distressed businesses with liquidity now in the COVID-19 crisis, this may entail disadvantages in terms of inheritance and gift tax. Any form of liquidity, whether credit balance with banks or cash, counts towards the funds as part of the administrative assets which are not privileged, just like the receivables referred to above. "Young" funds, which are defined as positive balance of deposits and withdrawals made in the 2-year period prior to the cut-off date are not included in the tax privilege. As a consequence, any deposits made now during the crisis will be subject to inheritance or gift tax in a planned or unplanned succession within the next 2 years. To avoid that gift tax is charged on the deposit at a later point in time, gifts should be made before the 2-year period expires, if possible (provided that no other deposits are made in the meantime). The investment clause may be claimed in the case of inheritance where the subsequent investment of harmful assets in tax-privileged assets or their use for wage payments helps avoid that it counts towards administrative assets. As a requirement, however, the testator must have prepared a related plan. Since the exact requirements of such an "investment plan" are unclear and controversial, this must be examined on a case-by-case basis.

It is currently not foreseeable in how far German legislature will provide relief. The fiscal authorities are also reluctant to accept considerations of equity in the field of inheritance and gift tax. Therefore, only an early assessment of the situation and precautions can help here.