German business owners warned they may be forced to slash investments and even sell holdings if they lose a privilege that has allowed them to avoid billions in taxes.
The country’s constitutional court will decide tomorrow whether families can continue to transfer companies from one generation to the next without having to pay estate tax.
The ruling is being watched with dread by political and business leaders because most of the country’s 3 million small- and medium-sized companies are privately owned. Collectively known as the Mittelstand, these companies serve as the backbone of Europe’s largest economy. More than 130,000 family businesses with 1.6 million employees are set to change hands by 2018, according to the BVMW industry association.
“It is expected that Germany’s highest court will tighten the legal rules,” Mario Ohoven, president of the BVMW industry association, said in an e-mail to Bloomberg. “That would make the handing over of companies in the German Mittelstand significantly more difficult.”
About 20 percent of Mittelstand companies are concerned that an end to the tax exemption would threaten their very existence, according to preliminary figures from the BVMW’s end- of-year survey of its 270,000 members. Another 10 percent say they’d have to invest less as a result. Ohoven said the trend in Europe is to do away with estate taxes completely or to significantly reduce them.
Transfering Ownership
Under the current law, corporate assets can be passed on tax free as long as the heirs keep the business for at least seven years without substantial firings. More than 90 percent of German companies are family-owned, and those businesses generate more than half of private sector revenue and employ more than 50 percent of the workforce, according to the Munich-based Family Business Foundation.
One such business is Fuchs Petrolub SE. Founded in 1931 by Rudolf Fuchs as an importer of high-end refinery products, today the world’s biggest independent maker of lubricants employs a global workforce of 3,900 people. Listed on the Frankfurt and Stuttgart exchanges, 53 percent of the voting stock in the Mannheim-based company remains in family hands.
Aware the exemption could be scrapped, Manfred Fuchs and his two sisters over the last decade have passed on more than 95 percent of the family’s assets in the company to the third generation, whose seven members include his son Stefan, who took over as chief executive officer in 2004.
Investment Endangered
“Without the exemption rule we may be forced to sell company shares and then you can’t rule out a hostile takeover,” said Manfred Fuchs. “If something were to happen to my son and the privilege no longer existed then, we’d face the same problem. Where should we get the money from? Our company needs to invest every year.”
The Karlsruhe-based Federal Constitutional Court will rule on the benefit after the country’s highest tax court said the exemption unfairly privileges family companies over individuals transferring non-business assets. The tax court also said the current rules allow too many tricks to get tax breaks without preserving jobs.
Essentially, someone owning a business can transfer assets worth billions of euros tax free, while the heirs of an investor passing on a few million euros in stock pay an estate tax of as much as 17 percent, according to Roman Seer, a law professor at the Ruhr University Bochum.
“The level of exemption is out of proportion,´´ said Seer. ‘‘Everybody expects the court to rescind the rules.´´
Government Action
With so much at stake, Chancellor Angela Merkel’s Christian Democrats are promising to take action if necessary. Finance Minister Wolfgang Schaeuble told magazine Der Spiegel in an article published over the weekend that he’ll introduce new discounts to spare family-owned companies from a higher tax burden should the court strike down the current law. The Finance Ministry declined yesterday to comment on what Schaeuble intends to do.
‘‘We will make sure that our German Mittelstand will create jobs and won’t have to pay estate tax,´´ Volker Kauder, the CDU’s parliamentary caucus leader, said during a speech in Cologne last week.
The easiest solution to protect German business and treat everyone equally might be to completely abolish the inheritance tax, which brings in about 5 billion euros ($6.22 billion) to government coffers annually, Seer said.
‘‘Its revenue is rather limited,’’ he said. ‘‘The costs associated with collecting it, on the other, are high.’’