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Our previous articles have commented at length on the decisions of the Federal Constitutional Court holding unconstitutional those parts of the net worth tax and gift and inheritance taxes which are based on standard assessed values (Einheitswerte).

A joint State/Federal tax workgroup was formed to study the decisions and to make proposals to the Government. This workgroup has since announced certain of its findings in tentative form (Handelsblatt 18/12/1995, p. 3). From these it is clear that uncertainty exists as to whether the net worth tax will be retained, as is generally favoured by States where the SPD is in office, or repealed, as CDU/CSU States seem to advocate. The workgroup makes no recommendation on this issue and presents some of its proposals in the alternative, depending on whether the net worth tax is retained or not. For instance, if the net worth tax is repealed, the workgroup recommends faster progression in the gift/inheritance tax rates to compensate for part of the revenue lost. Higher valuation of real property passing by gift or inheritance would also tend to increase the yield of the gift/estate tax. Nevertheless, it is not anticipated that the gift/inheritance tax could be made to make up more than 1/4 to 1/2 of the shortfall. Projected 1996 revenue from the net worth and gift/inheritance taxes is DM 8.5 billion and DM 3.6 billion respectively. The rest of the shortfall would, in the workgroup's view, have to be equalised by cutting tax benefits in other areas.

If the net worth tax is retained, the workgroup has ideas for a new real property valuation system. If it is dropped, the workgroup appears to believe that business property could be valued for gift/inheritance tax purposes at book value.

Other proposals were as follows:

- reduction in the net worth tax rates for individuals to 0.5 %;
- substantial increases in various exemptions for both taxes; in particular,
- increasing the valuation exemption for business property under the gift/inheritance tax from 25 % to 40 % (sec. 13 par. 2a ErbStG).

When considering the implications of the Federal Constitutional Court's real estate valuation decisions, it is important to distinguish between the net worth tax on the one hand and the gift and inheritance taxes on the other. With respect to the net worth tax, the Government need make no changes until the end of 1996. Thereafter, it may, depending on what it decides to do, have an additional grace period of up to five years (until the end of 2001) during which a transitional system is permissible. The time pressure is much greater, however, for the gift and inheritance tax law, which must be changed effective 1 January 1996. No legislation has as yet been passed. Changes legislated in the course of 1996 can be retroactive to the first of this year (retroactivity for tax laws is limited to the beginning of the calendar year in which they are enacted). Should the legislature not enact a new bill by the end of 1996, an interim period of at least one year will result in which there will be no gift/inheritance tax at all.

It is worth remembering that, while both the net worth tax and the inheritance/gift taxes yield relatively little revenue (in 1994: 0.008 % and 0.004 % of total tax revenue respectively), the net worth tax even now costs more to administer (32 % of its gross revenue) because it is collected annually from all natural and juridical persons, whereas the inheritance and gift taxes are triggered by relatively infrequent events. The high administrative cost of the net worth tax is the principal argument in favour of its abolition.

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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.