The German state is missing out on billions in revenue because it often exempts very large assets from inheritance tax. This is intended to preserve companies and jobs. However, the research situation on whether the current rules harm or benefit the economy is complicated.
For some it's about nothing less than the question of whether Germany is changing from a "performance" society to a "heir society", while for others it's about "envy" and the threat of "breaking up" the German middle class. When it comes to the issue of inheritance tax, which the Federal Constitutional Court is - once again - negotiating today, emotions are high on both sides: To what extent should assets that are invested as capital in companies be spared from inheritance tax? It is true that the highest German court is not fundamentally reviewing the protection of business assets, but only the specific design of the current rules. However, the decision of the constitutional judges is likely to have a decisive influence on the political debate about possible reforms.
Huge sums are at stake for the state and for the heirs. In 2024, almost 3.4 billion euros in inheritance tax were waived based on the exemption rules for business assets. This is around a quarter of the total inheritance tax revenue. There are also tax-free transfers of business assets to children. Large assets are particularly affected, while there is less leeway for smaller ones. The organization Network Tax Justice complains that the structure of the inheritance tax is contributing to Germany's development from a performance-based society to a "inheritance society". Numerous well-known economists, for example from the German Institute for Economic Research (DIW) or the Munich Ifo Institute, and the majority of economists advocate a reform that largely equates different types of assets and reduces exceptions.
However, there is great resistance to reform, including from parts of the federal government. Economics Minister Katherina Reiche does not want to change the current rules and sees an “unpleasant debate of envy” among the critics. Like employers' and business associations, it takes the position that without tax exemptions, medium-sized businesses in particular would be at risk of extinction and thus the loss of jobs in the event of an inheritance. The head of the employer lobby organization Initiative New Social Market Economy (INSM) Thomas Aschleben described reform proposals as a “medium-sized business destruction concept”. Hundreds of thousands of jobs would be at risk if business heirs were burdened with inheritance tax without exceptions.
The background to the tax exemption for sometimes huge business assets is the concern that heirs would have to sell companies or harm them by withdrawing capital from them in order to pay the inheritance tax. After all, the assets of some entrepreneurs, whose value amounts to many millions or billions, consist of the ownership of companies. In these cases, liquid funds sufficient to pay the inheritance tax in one fell swoop are often not available.
Studies show influence on investments
In an earlier decision on the subject, the Constitutional Court had already determined that the protection of business assets is only compatible with the Basic Law under strict conditions. It must be examined in each individual case whether the tax waiver is really necessary to maintain jobs.
According to critics, the high figures for waived taxes in recent years indicate that these tests have not been particularly strict in practice. Many economists believe the current rules are too generous. They advocate taxing all types of assets equally in the event of inheritance, but reducing overall tax rates and allowing deferrals over longer periods.
The fact that the two camps are so irreconcilable in the debate is also due to the fact that scientific facts are rare. There is no empirical data available for Germany about the threat to companies and jobs caused by inheritance tax payments, as economists, among others, found in their statement on the subject.
Various international studies suggest that the exact rules for tax exemption influence investment decisions. In general, the exemption should tend to promote investments in companies and could, among other things, prevent company sales.
In order to benefit from the high tax breaks, heirs prefer to succeed at the top of the company themselves rather than handing the family business into the hands of investors. The choice of company form is also influenced by tax rules. Economists view this critically. The current regulation distorts business decisions, for example when succession planning is not about who can best manage a company, but rather how the most taxes can be saved.
