The technical terms “regular protection” and “approval requirements test” known from inheritance and gift tax law are aimed at relieving company successions. They therefore concern only business assets, and administrative assets are to a certain extent harmless. The protection requirements test has been introduced as a supplement to the rule protection, because the rule protection is only fully usable up to an asset of EUR 26 million. With this value, instead of the rule protection (or the alternative option protection) you can apply for an exemption requirement test, the result of which ideally, as with Matthias Döpfner, means a complete tax exemption. However, a number of prerequisites must be adhered to both for the control protection and for the protection requirements test. Here we give you the most important regulations.

1st Control Protection and Protection Requirements Test – Introduction

Business succession is the last major hurdle in the course of their career for many experienced entrepreneurs. Most of them prefer succession within their own family. But interest in taking over, for example, a parental business has been declining in Germany recently. In fact, entrepreneurs increasingly perceive the company sale as an alternative positively. Nevertheless, transfer by way of inheritance or gift is the preferred. Even company succession outside of one’s own family is quite often regulated by inheritance or donation.

If you now take this path, you have to deal logically with another challenge, namely the gift tax or inheritance tax. Depending on the degree of kinship between the owners and the recipients, however, the taxes are different.

Since the legislator noted that the succession of companies through inheritance or donation due to the arising tax can lead to a risk to jobs, over time he has expanded the tax law in this regard with some regulations that lead to the sparing of business assets. We want to present these special rules in this article. In order to do this, however, we must first address these legal bases, which is what we are inserting here.

2nd regulation protection and protection requirements test: legal bases

There are two regulations with which you can relieve business assets under inheritance tax and gift tax: the standard exemption and the exemption requirements test. The rule protection is standardized in § 13a ErbStG. In addition, a certain extension of the validity effect is contained in § 13c ErbStG. On the other hand, § 28a ErbStG deals with the protection requirements test.

The regulations for avoiding inheritance or gift tax in the transfer of business assets are extensive. You already start with the definition of the technical term “beneficiary assets” in § 13b ErbStG. As we will show in a moment, it is basically simply operating assets of one kind or another. However, in order to benefit from the exemptions to avoid taxation, the business assets must be practically free of administrative assets (the administrative assets regulations are so extensive that a separate article can be written for this purpose). Furthermore, it states, among other things, that both business assets invested in an agricultural or forestry holding can make use of this exemption as well as individual enterprises, including professional enterprises, partnerships and corporations.

3rd standard exemption for operating assets

3.1. Standard protection of 85 % of operating assets

3.1.1. Deduction for standard exemption

The standard exemption applies to operating assets up to EUR 26 million. In principle, the exemption under § 13a (1) ErbStG provides for a tax exemption of 85 %. Thus, only 15 % of the assets transferred are subject to taxation. Of course, before the tax calculation, the deduction of allowances takes place, as well as the deduction of any costs associated with the transfer of capital.

This standard also grants a deduction of an additional EUR 150,000. This means that purchases worth EUR 150,000 plus the individually applicable allowance are tax-free. However, the deduction is reduced if the operating assets are above this limit. This is because the reduction is 50% of the value above this limit, so that the deduction amount from an operating capital of EUR 450,000 is completely lost.

3.1.2 Provisions on the exemption rate

The tax-free amount is called an exemption deduction. However, it is only granted under certain conditions. The prerequisite for this is that the acquirer of a partnership or corporation continues to operate during the five years following its acquisition. In addition, he must retain at least 400 % of the total wages paid by the holding during a marketing year. The reference value is the so-called initial wage sum (one also speaks of the minimum wage sum). This initial wage sum is obtained by adding the wage sum of the five marketing years before the transfer and establishing their average.

But there are also exceptions to this rule that influence the rule sparing according to height. On the one hand, the payroll rule is disregarded if the minimum wage sum is EUR 0 or the number of employees in the holding is no more than five, including employees in subsidiaries of the holding. Furthermore, § 13a ErbStG provides the option to reduce the amount of the percentage of the wage sum. It can be set at 250 % for six to ten employees or 300 % for 11 to 15.

Should the wage sum finally be undershot, the relief discount will be reduced in the same amount. With a wage total of 399 %, only 84 % would remain tax-free under the standard exemption.

Alternative to rule protection: 100% option protection

In addition to this general rule exemption, which only partially protects against taxation, the legislature has legally established another option, the so-called option exemption. You can even save 100% of the inheritance or gift tax if you keep a payroll of 700% over a payroll period of seven years. Of course, the retention period of the company is also extended to seven years. Instead of a payroll of 700 %, only 500 % is expected for a workforce of between six and ten employees and 565 % for 11 to 15 employees.

3.3. How can the rule protection or the option protection be reduced?

If the taxable business assets exceed the limit of EUR 26 million, you can still receive the relief discount, albeit with a certain reduction. The reduction shall be based on the amount exceeded. For every EUR 750,000 above the limit of EUR 26 million, the relief discount is 1% lower. If the operating assets amount to EUR 26,750,000, only 84% are tax-free. Therefore, it is possible to calculate quite quickly at which operating assets no longer sparing the rules takes place, because the complete sparing of 85% is consumed. In short, this occurs from an operating assets of EUR 89.750.000. In fact, the legislature has introduced a maximum limit of EUR 90 million in § 13c ErbStG for the alternative case of an option exemption.

Incidentally, the taxable person who has received the standard exemption of one kind or another (85 % or 100 %) is obliged to inform the competent tax office if the wage sum is less than half a year. This report is already considered a tax return.

3.4. Further conditions for obtaining the control protection

A few words on the regulation, according to which you have to continue the operation for five or seven years in order to secure the rule protection or the option protection. Within the retention period, shares of a company may not be partially sold or transferred to another company by means of a hidden contribution. Furthermore, you may not make withdrawals that exceed the sum of your own deposits and profit shares by EUR 150,000.

Furthermore, the law provides that subsequent acquisitions by the same person lead to a re-evaluation of the previous rule exemption and thus to a possible re-taxation. However, this only applies to taxable acquisitions within ten years. The deduction amount is also only available once within this period.

4th conservation needs test

The conservation requirements test now applies to operating assets with a value of more than EUR 26 million. Although it is possible to continue to use the standard protection up to a value of EUR 90 million, it may be worthwhile considering the possibilities of a protection requirements test. § 28a ErbStG opens up the possibility that a person who receives such business assets through inheritance or donation, but has no other assets besides this business assets with which he could pay the tax, can submit an application for a relief needs test. If this examination by the tax office also comes to the conclusion that this is the case, the taxable person can be pleased about a remission of the tax.

This is of course only the simple explanation. The details are much more complex. So you have to understand exactly what the legislator understands by freely available assets. For example, everything you receive in addition to the business assets by way of an inheritance or donation counts, especially liquid funds. But also own property, which was already available before the inheritance or donation and which does not represent a beneficiary property, must be used to pay the tax. However, this only applies to 50 % of the freely available assets; The rest is spared.

Apart from this, the taxable person also meets other requirements if he follows the path of the relief needs test. Here, too, it is obliged to respect a retention period of seven years. During this period, the wage bill must again be at least 700%. The other requirements, which are known in this context from the control protection or the option protection, also apply here.

Our conclusion on the regulation protection and protection requirements test

Aware that a tax on the transfer of business assets could partly force the transferees to use part of the newly received property to pay the inheritance or gift tax, and this in turn puts jobs at risk, the legislature decided in 2009 to create tax exemptions. Initially, there was only the option to spare the rules. However, since the standard protection can only develop this protective effect to a certain extent for larger operating assets, it was finally supplemented by the protection requirements test in 2016.

Unlike the standard waiver, the waiver needs test is only applicable upon request by the taxable person who acquires the business assets. The rule exemption is therefore automatically granted by the tax office. If you choose to exempt from options, this must be indicated in the tax declaration. This makes it easier for the heirs or gifted persons to use these tax breaks.

Nevertheless, the regulations for the protection of regulations and for the protection requirements testing are quite complex. To make matters worse, one should pay attention to their diverse and numerous conditions over a longer period of up to ten years in order to enjoy their benefits permanently. In turn, these are so large that even a complete tax exemption is realistic. In any case, a comparable exemption is rarely found in the entire German tax law. Against this background, it is certainly understandable that the conditions for using the rule protection, the option protection and especially the protection requirements test are so extensive and restrictive. Therefore, you should always weigh well whether you want to use the rule protection, the option protection or the protection requirements test. This is especially true if it can be foreseen that the prospects for compliance with the relevant conditions are hardly achievable. Perhaps then other tax arrangements will be more advantageous.