date | theme

24. July 2019 | Saving inheritance tax through chain gifting: deadlines and criteria

29. July 2019 | Inheritance / Donation: Private assets transferred tax-optimized

02. October 2020 | Avoid inheritance tax and gift tax abroad

04. February 2021 | Pool Agreements / Pool Contracts – Inheritance and Gift Tax

15. December 2021 | Avoid gift tax for gifting large assets (this contribution)

If you want to transfer larger assets by gift, you often look for ways to avoid the gift tax. This is achieved, for example, by investing the assets in a construction project. For this purpose, a GmbH & Co. KG is set up and these assets are brought in. Shortly before completion of the construction project, you can then give away the participation in the GmbH & Co. KG. It is important here that the property is not yet available for use by a third party. In this particular situation, this represents the gift of beneficiary assets. The gifted person can then explain to the tax office that this should be done 100% tax-free in accordance with the inheritance and gift tax law. However, there are some conditions attached to this. Among other things, there is then a retention period of seven years. At the same time, however, it is also necessary to pass an assessment of the conservation requirements.

Who wants to transfer larger assets by gift, has every reason to avoid the gift tax as far as possible. Whether one wants to consider the gift of larger assets to the spouse, one’s own children, close or distant relatives or even other persons, the regular gift tax leads to a considerable burden in this case. This is on the one hand due to the relatively small allowance amounts for this order of magnitude. On the other hand, the applicable tax rate can be up to 50%.

However, the German gift tax and inheritance tax law has some gaps that can be used in the design to legally avoid the gift tax. We want to give an example of this in this article.

Before we deal in our example with the design by which we intend to avoid the gift tax in the case of a gift of larger assets, we want to set the parameters for this.

We assume that a very wealthy person, whom we want to call Ms. Mia Midas, wants to give away a liquid asset of EUR 100,000,000. Since the amount of the allowance applicable to a gift of this magnitude is essentially irrelevant, we leave it uncertain whether the person to be gifted is now a relative or not of Mrs Midas. It is true that the tax rate would also depend on this classification, but since we aim to avoid the gift tax altogether, this aspect can also be neglected.

Mia Midas now buys a building-ready property with her assets. There are now rental properties to be created. The value of this property should be EUR 100,000,000 at completion. To realize this project, Ms. Midas founded a GmbH & Co. KG. Mrs Midas is 100% involved in this as a limited partner. Ms. Midas also holds a 100% stake in Komplementär-GmbH. Now Ms. Midas brings the property into her GmbH & Co. KG. The construction project can thus begin.

Alternatively, you can first set up the GmbH & Co. KG and then transfer the liquid assets to the company by contribution. As a result, it is then able to acquire and build the property.

Shortly before the construction project is completed, Ms. Midas goes to the notary and transfers her shares in GmbH & Co. KG by way of a gift to the person of her choice. It is important here that the property worth EUR 100.000.000 is not yet available for use by a third party. In addition, the gifted person should not have any significant own assets.

It may now be noted that the gift tax is applicable in any case, regardless of whether such a large asset is transferred in the form of liquid funds, land or a share in a partnership. In principle, that is right. However, there are tax benefits for business assets, as is the case in our example. With these special rules, the legislator pursues the goal of ensuring the continuation of companies. This is because it is intended indirectly to protect workers from redundancies, which could threaten if the beneficiary of such a gift tried in this way to finance the gift tax. That is why the legislature has included exceptions in the inheritance and gift tax law, which make it possible to reduce the gift tax or even to avoid it altogether.

In order to understand now why the donation in our example represents beneficiary assets, you have to consult § 13b (1) number 2 ErbStG. Because it says that the holdings, such as Ms Midas, belong to the eligible assets. But it also depends on the kind of wealth that the society to be given away calls its own. Because if it were only liquid funds, for example, it would represent administrative assets. And that would be taxable. However, this approach also applies to real estate if this real estate is available to third parties for use (§ 13b (4) no. 1 ErbStG). If the company, whose shares you want to give away or inherit, contains rented properties, then you can not avoid the gift tax.

The key to the success of our design model is therefore that although in principle there is administrative assets, which in the form we use is an exception in tax law and is therefore not subject to taxation, because the criterion of transferring use to third parties, which is also important, is missing. However, since the nature of administrative assets is therefore inappropriate for this specific case, the assets transferred by Ms Midas must therefore, conversely, constitute assets benefiting from the scheme.

4.3.1. Seven years retention period

Anyone who has now read the corresponding laws in the inheritance tax law attentively should also have recognized the connection to § 13a (1) ErbStG. Because the rules for the taxation of beneficiary assets are enshrined in law there. However, if you read it carefully, only 85 % of the beneficiary assets are disregarded for taxation. So how can we completely avoid the gift tax in our example?

The answer to this is a look at § 13a paragraph 10 ErbStG. Because here the law opens an alternative, which can be used as a buyer of the gift by declaration to the tax office. Thus, this alternative actually provides for the complete tax exemption, if, among other things, instead of the otherwise applicable retention period of five years, a duration of seven years should now apply. The other framework conditions, which must be explained in order to avoid the gift tax completely, concern the wage sum of the transferred company, which we want to discuss in this article only with this sentence. After all, these criteria play only a minor role in our example.

4.3.2. Conservation needs test

Another framework that must be considered in our model in order to avoid the gift tax when transferring such a large asset is the relief needs test. The recipient of the gift must prove that the necessary financial resources to pay a corresponding gift tax are missing. The protection requirements test is regulated in § 28a ErbStG. However, this special regulation only applies to so-called large acquisitions. Simply put, this involves transfers of assets in the order of more than EUR 90,000,000. This is why the protection requirements test is also relevant in our example.

In fact, the design model we presented, with which you can give away larger assets but at the same time avoid the gift tax, can also be implemented in other ways. Because the condition that the property is not available for use by a third party can also apply to already built buildings. For example, this is the case if real estate is vacant due to renovation measures. Of course, this also applies if real estate has no tenants for other reasons.

Another note on the sidelines: Anyone who considers a similar case in reality unlikely can find out about it in our contribution to the donation of Friede Springer to Mathias Döpfner. Although a different tax design construct has been used to avoid the gift tax, an even larger fortune has been transferred to Mathias Döpfner – and largely tax-free.