The transfer of business assets is in principle exempt under inheritance tax in accordance with §§ 13a, 13b ErbStG. However, this exemption is subject to a retention period. Compliance with the retention period for multi-storey companies can be problematic. In the case of a multi-storey company, the sub-person company can become insolvent. Then it is questionable whether tax-exempt business assets transferred by the parent company may well be subject to tax. It is then necessary to clarify under which conditions it is subject to re-control as a result of the elimination of the protection deduction. This issue is addressed in this contribution.

Multi-storey company structures exist when a company is involved in other companies. These companies are called subsidiaries. It may happen that a sub-company becomes insolvent and assets are sold as part of this insolvency procedure. Then the sale could break through to the upper company. The tax exemption of business assets according to § 13a, 13b ErbStG is dependent on certain retention periods. These could have been undercut by the divestments of the sub-personnel companies. As a result, the protection discount could subsequently be eliminated. This could lead to the fact that, as a result of the sales, originally exempt transfers have to be paid back.

Cases leading to the abolition of the immunity deduction are regulated in § 13a VI ErbStG. Accordingly, the operation may not be sold within five years of the acquisition. The insolvency of the sub-company in itself could be a damaging task of the business. The task of a commercial enterprise is equivalent to sale. Therefore, the task can also be a harmful act. It does not depend on the reasons for the task. For this reason, forced divestitures or the insolvency-related abandonment of the company also lead to the proportional abolition of the relief deduction.

The sole opening of insolvency proceedings, on the other hand, does not constitute a task of the business. In addition, the opening of insolvency proceedings is not comparable to the operational task. In the course of the insolvency proceedings, it is possible that the operation is initially or permanently continued or only insignificant operating bases are sold in order to satisfy the creditors. Only when the insolvency administrator finally ceases operations is there an operational task. Therefore, the opening of insolvency proceedings is not yet an operational task.

These principles must especially apply to multi-storey companies. If the opening of insolvency in the case of a company does not lead to its operational task, the opening of insolvency in the case of a sub-company in which the parent company has only a stakeholder position can certainly not be regarded as an operational task of the parent company. There is also no corporate insolvency. Affiliated companies therefore remain independent from insolvency law.

Technical advice for

Exemption of business assets?

The abolition of the exemption deduction and the resulting re-taxation would be conceivable if essential operating bases were sold within the retention periods. It is relevant whether the asset is essential for the holding according to the type of holding and its function in the holding. It is therefore necessary to examine whether the assets of the sub-company are essential operating bases of the parent company. This would be conceivable if the sub-company is an essential pillar of the upper company. This is countered by the fact that the sub-company probably has hardly any positive earning power due to its insolvency. Therefore, it will not be so decisive for the operation of the upper company.

In addition, the concept of the essential operating bases must in principle be interpreted as income tax. For income tax purposes, the subsidiaries’ individual key operating bases are only their key operating bases. They cannot even be economic assets of the upper company, since they are assigned to the lower company. Consequently, they cannot be essential operating bases of the parent company.

In view of the purpose of § 13a I ErbStG and the retention periods, however, it may be necessary to deviate from the income tax principles. The purpose of the retroactive taxation rule is to maintain the full legal position of the previous holder in relation to the transferred assets in the person of the acquirer for at least five years. Only then do the risks from social ties pass to the purchaser. Jobs are to be secured by avoiding inheritance tax and gift tax. However, this goal is not achieved if assets that the upper company can actually use and that have a considerable weight for the operation can simply be sold. Therefore, it is possible that economic goods of the sub-society are also essential for the upper company.

An asset of the sub-company is functionally essential for the upper company if it is of considerable importance for the operation of the company and is therefore necessary for the continuation of the operation of the upper company. Qualitative and quantitative characteristics shall be used to assess whether an asset fulfils these conditions. Therefore, the circumstances of the individual case are decisive. For example, a property of the sub-company can be an essential operating basis of the parent company if it forms the geographical and functional basis for the business activities of the parent company and is available to the parent company.

If you purchase tax-exempt business assets, you must always pay attention to what happens to the subsidiaries in multi-storey structures and whether they sell essential business assets that are also essential for your business. Since corresponding retention periods must also be observed for other exemptions, the principles also apply there. For example, divestments in the subsidiaries could also represent capital gains that must be taken into account in the framework of the relief needs assessment.