Federal Constitutional Court: Company heirs preferred? Karlsruhe is examining tax privileges

The inheritance tax must be reformed – the black-red coalition agrees on this. The “how” is still being debated. First of all, we are eagerly awaiting a judge's decision from Karlsruhe.

Karlsruhe. Anyone who inherits a business or parts of a company can benefit from extensive tax advantages in Germany. This is sometimes harshly criticized in politics and society. The Federal Constitutional Court should now clarify: Are these privileges for company heirs compatible with the Basic Law? On Tuesday, the court heard oral arguments in Karlsruhe.

In the case, a man is suing who inherited from his aunt - but only private assets and not tax-privileged business assets. His constitutional complaint concerns the question of whether he is being unconstitutionally disadvantaged when it comes to taxes compared to company heirs. A verdict is not expected for a few months. An overview of the legal sticking points and the state of the political debate:

Who has paid inheritance tax so far – and how much?

In principle, anyone who receives assets through the death of another person is liable to tax. This can be cash, a house, a company, securities, jewelry or company shares. How much inheritance tax you pay depends on the degree of relationship and the value of the inheritance. The tax rates are between 7 and 50 percent. The more you inherit and the more distantly related you are to the person who died, the more taxes you have to pay.

According to estimates, 200 to 400 billion euros change hands in Germany through inheritances and gifts every year. In 2025, the state collected taxes amounting to 21.4 billion euros.

What exceptions are there?

According to the Federal Statistical Office, most inheritances and gifts are within the exemption limits. Spouses can inherit up to 500,000 euros and their own children can inherit up to 400,000 euros tax-free. You can also inherit your parents' house tax-free if you live in it for at least ten years and the living space does not exceed 200 square meters.

The Federal Constitutional Court is dealing with tax advantages for people who inherit entire companies or parts of companies. In Germany, business assets can be spared 85 percent of inheritance tax if the heir continues the business for at least five years. Anyone who keeps the assets for more than seven years and meets other requirements can apply for a complete exemption. These benefits only apply to assets under 26 million euros. For larger companies there are sometimes even more generous regulations.

What do the critics say?

Wealth is very unequally distributed in Germany, says Julia Jirmann from the Tax Justice Network. Inheritances and gifts are playing an increasingly important role in building wealth - more than half of private assets today were not acquired during one's lifetime, but were inherited or donated. Quite apart from distribution policy and constitutional concerns, the generous regulations for business assets also inhibit innovative entrepreneurship.

The German Federation of Trade Unions (DGB) finds the privileges “unfair” and is calling for them to be abolished. “The special rules for business assets in inheritance tax are the largest tax subsidy in the federal government’s subsidy report year after year,” says DGB deputy chairman Stefan Körzell. In the current year alone they cost almost nine billion euros. “This money is urgently needed for important investments in education, infrastructure and social security.”

What do the companies say about this?

The Federation of German Industries (BDI) defends the privileges for business assets. A high company value does not mean that heirs have appropriate liquid assets. The association argues that business assets are often tied up long-term in machines or buildings. The tax advantages are therefore not a personal privilege of the heirs, but rather serve to protect business units.

What did the Federal Constitutional Court decide in 2014?

It is not the first time that the Federal Constitutional Court has dealt with tax advantages for company heirs. At the end of 2014, the court recently overturned the privileges in force at the time as being too far-reaching. The court generally approved that business assets can be exempt from inheritance tax in order to secure their existence. However, the specific regulations are disproportionate if they extend beyond small and medium-sized businesses without providing for a needs test. Now it will be seen whether Berlin has correctly implemented the requirements from Karlsruhe.

What has changed since then?

Since 2016, the “exemption needs test” has applied to large business assets. According to this, the inheritance and gift tax can be waived for business assets over 26 million euros if the purchaser proves that they cannot pay the tax from their private assets. But that attracts criticism. The more than five-hour negotiation in Karlsruhe focused, among other things, on whether the regulation is compatible with the principle of equality in the Basic Law.

The former SPD general secretary Kevin Kühnert, who now works for the citizens' movement Finanzwende, criticized in Karlsruhe that the needs test "invites people to do poor math." Because it doesn't ask what is necessary to protect companies and jobs, but only whether the entrepreneur is liquid. If he prepares by moving money to other places on the deadline, the tax liability will be eliminated without compensation. “That upsets a lot of people,” said Kühnert.

What is important now in Karlsruhe?

The procedure once again raises the question of what limits the Basic Law sets for the legislature when designing the exceptions, said court President Stephan Harbarth at the beginning of the hearing. Among other things, this involves the “requirements for protecting large business assets in particular”. The focus is also on the extent to which the challenged regulations are supported by the legislature's goal.

The question of the equal burden on taxpayers – especially through inheritance tax – “significantly affects the sense of justice of many people in our country,” said Harbarth. This is offset by concerns about the economic existence of companies and the preservation of jobs. This raises difficult political questions - but these are not the issue here, emphasized Harbarth. The proceedings are exclusively about the constitutionality of the standards.

What is the political status of inheritance tax?

There is consensus in the black-red coalition that the inheritance tax needs to be reformed. But that's where the similarities end. While the SPD would have liked to have started long ago and is driving the debate, the CDU and CSU want to wait and see what the Federal Constitutional Court decides.

Federal Finance Minister Lars Klingbeil emphasized on Sunday that it is not fair when assets worth millions and billions are often inherited almost tax-free, while smaller inheritances are taxed. "This exacerbates inequality in our country. Strong shoulders have to carry more," warned the SPD leader. His party has made suggestions on this. “As soon as the Federal Constitutional Court has clarified the legal framework, we want to implement it.”

What proposals are on the table?

The SPD wants to close the loopholes through which large assets can be transferred almost tax-free - primarily through the means test. She proposes an allowance for companies of five million euros. There should also be generous options for deferrals - i.e. for postponing payments - so that no company has to close. The SPD wants a lifetime allowance of one million euros for smaller inheritances.

The Union rejects the proposals. In the current economic situation, medium-sized businesses and family businesses should not be put under any additional burden, argue the CDU and CSU. The CSU advocates a regionalization of inheritance tax so that the federal states can determine the amount themselves depending on their financial situation. On Monday, the Federal Constitutional Court heard a corresponding lawsuit from the Bavarian state government.