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The German 1997 Annual Tax Act
The German 1997 Annual Tax Act (Jahressteuergesetz 1997) was enacted into law in December of 1996 and has since entered into force. Most, but not all, of its provisions take effect on 1 January 1997. Please note that this article is one of a 14-part set of articles describing the 1997 Annual Tax Act.
IX. GIFT AND INHERITANCE TAX
In addition to the principle that different types of property must be subjected to uniform taxation in accordance with their value (see article 6 in this set of articles), the ruling of the Federal Constitutional Court of 22 June 1995 articulated two other constitutional imperatives with direct impact on the gift and inheritance tax:
- that a certain reasonable basic amount of personal wealth must be allowed to pass free of inheritance tax between close relatives and
- that the imposition of inheritance tax may not endanger the survival of small and medium sized business irrespective of the relationship of the heir to the decedent.
The 1997 Annual Tax Act makes a number of major changes in the gift and inheritance tax area in implementation of the mandate of the Federal Constitutional Court. With the one exception mentioned below, these changes are retroactive to 1 January 1996.
9.1 TAX RATE CATEGORIES
Under the German inheritance tax system, heirs and donees are subject to different tax rates depending on their relation to the decedent or donor. The number of such tax rate categories has been reduced from four to three by merging the previous Class II heirs into the existing Class I to form a new Class I consisting of spouses, children including stepchildren, their children and children's children (grandchildren and great-grandchildren), and (if taking by inheritance) parents and grandparents. The previous Classes III and IV then form the new Classes II and III.
9.2 EXEMPTION AMOUNTS
The personal exemption amounts have been increased as follows:
DM Spouses 600,000 Children 400,000 Grandchildren, great-grandchildren, and (grand)parents taking by inheritance 100,000 (Grand)parents taking inter vivos, siblings, divorced spouses 20,000 Other persons and transfers for specified purposes 10,000
9.3 TAX RATES
The tax rates have been revised to generate revenue needed to compensate for reductions resulting from the discontinuation of the net worth tax effective 1 January 1997 and the changes discussed in this Part IX. While the maximum tax rate has been reduced for all three categories of beneficiaries, the initial tax rate has also risen considerably for Class I beneficiaries, as is shown by the following table:
Tax Category Initial Tax Rate Highest Tax Rate (%) (%) Old I 3 35 New I 7 30 Old II 6 50 New I 7 30 Old III 11 65 New II 12 40 Old IV 20 70 New III 17 50
The gift and inheritance tax table has also been greatly simplified in that it now includes only 7 graduated rates, as opposed to the previous 25, with the highest bracket being reached at DM 50 million (previously, DM 100 million). In many cases, the new rates result in significantly higher taxation than before.
9.4 TRANSFERS OF BUSINESS PROPERTY
9.4.1 Valuation discount
Previously, a special exemption amount of DM 500,000 and a valuation discount of 25 % applied when business property and shares in domestic corporations in which the transferor held at least a 25 % interest changed hands either as a so-called "anticipated inheritance transfer" (vorweggenommene Erbfolge) or by inheritance (testate or intestate). The valuation discount applied to the taxable property in excess of the special exemption. The 1997 Annual Tax Act increases the valuation discount to 40 %, so that tax is now imposed on only 60 % of the amount in excess of DM 500,000.
9.4.2 Qualifying property
The scope of the above benefits (exemption and valuation discount) has also been expanded to include farming and forestry enterprises. The benefits also now apply to all property taken causa mortis (by reason of death), irrespective of whether German inheritance law classifies the beneficiary as an "heir" or not. On the other hand, the requirements with respect to shares in domestic corporations have also been tightened to require an interest in excess of 25 %. This eliminates effective 1 January 1997 a discrepancy between interests qualifying for treatment as business property under the gift and inheritance tax law and material ownership interests in corporations for income tax purposes (sec. 17 EStG).
9.4.3 Anti-abuse clause
The provisions respecting preferential treatment of business property have been moved from sec. 13 par. 2a ErbStG to a new sec. 13a ErbStG. At the same time, as new sec. 13a par. 5 no. 3 ErbStG, a new anti-abuse provision has been added under which the preferential treatment is retroactively reversed if, during the 5 year period following acquisition of the qualifying property, the transferee withdraws sums from the business which exceed by more than DM 100,000 the sum of his contributions to the business and the profits or profit shares attributed to him since the time of acquisition.
9.4.4 Tax rate category
Acquisitions qualifying for preferential treatment under sec. 13a ErbStG are also, irrespective of the relationship of the transferor to the transferee, subject to taxation at the rates applicable to Class I beneficiaries. This is accomplished by granting a tax reduction amount, the details of which are contained in new sec. 19a ErbStG.
9.4.5 Allowance for debts and charges
The new legislation introduces a new restriction on the benefits accorded transfers of business property in new sec. 10 par. 6 sent. 4 (bb) ErbStG. This provides that debts and charges economically related to agricultural or forestry property or shares in corporations exempt from tax under sec. 13a ErbStG may only be deducted in proportion to the share of such property which remains subject to taxation. Such prorating is not required with respect to debts and charges on other qualifying business property.
9.5 Other changes
The 1997 Annual Tax Act also included numerous technical changes in the gift and estate tax law and its associated implementing regulations. One of the changes in the implementing regulations raises the limits at which notaries and courts are required to report transactions to the tax authorities.
This article is one of a 14-part set of articles entitled "The German 1997 Annual Tax Act" in which we have endeavoured to provide a useful overview of what we consider to be the major changes made in the German laws by the 1997 Annual Tax Act and, more selectively, by other recent legislation. To access the other articles in the set please enter 'The German 1997 Annual Tax Act', 'KPMG Tax Advisers' and 'Business Monitor'. We are of course at your disposal to discuss in depth the ramifications of new provisions which are of particular interest to you.
Disclaimer and Copyright
This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.