German Inheritance Tax & Business Assets Guide
Last updated: 9 Oct 2025
German Inheritance Tax & Business Assets
A focused guide to how German inheritance tax (Erbschaftsteuer) treats business assets: which assets qualify for relief, how the 85% regular relief and 100% option relief work (§§ 13a/13b ErbStG), the payroll and retention tests, limits on administrative assets and excess cash, valuation approaches, clawbacks, special rules for large transfers, and cross-border considerations for shares, partnerships, and permanent establishments.
Contents
- What counts as “business assets” (§§ 13a/13b ErbStG)
- Relief models: 85% vs. 100% (requirements at a glance)
- Retention, wage-sum, and administrative-asset tests
- Valuation of companies & shares (BewG / IDW S 1)
- Clawbacks: harmful events, excess distributions, restructuring
- Large transfers (>€26m): reduction model vs. needs test
- Cross-border: situs, shareholdings, PEs & foreign-tax credits
- Practical planning ideas (before & after death)
- FAQ
- Author
What counts as “business assets” (§§ 13a/13b ErbStG)
Qualifying asset types (examples)
- Operating business assets of sole proprietors and partnerships (Mitunternehmerschaften).
- Shares in corporations (e.g., GmbH/AG) if a minimum shareholding is met—typically ≥ 25% per recipient; pooling agreements among shareholders may allow pooling to reach the threshold.
- Co-entrepreneur interests in German or foreign partnerships where business activity predominates.
Non-qualifying or limited cases
- Pure passive assets (portfolio holdings, excess cash, certain rentals) are administrative assets and restricted.
- Short-term acquired passive assets (“young” administrative assets) are typically excluded from relief.
- Real estate companies: relief depends on whether genuine operating activity exists and the administrative-asset quotas are met.
Relief models: 85% vs. 100% (requirements at a glance)
| Feature | Regular relief | Option relief |
|---|---|---|
| Relief percentage | 85% exemption on qualifying business value | 100% exemption (stricter entry conditions) |
| Retention period | 5 years | 7 years |
| Wage-sum test (for employers above a small-business threshold) | Cumulative wage-sum typically ≥ 400% over 5 years | Cumulative wage-sum typically ≥ 700% over 7 years |
| Administrative-asset quota | Strict limit on passive/financial assets; relief denied if quota exceeded | At least as strict as regular relief; practical tolerance is low |
| Employees threshold | Wage-sum test generally not required for very small headcounts (e.g., ≤5 employees) | Same concept; details depend on current headcount rules |
Exact thresholds and definitions are technical; we verify them against the current ErbStG wording and administrative guidance for each engagement.
Retention, wage-sum, and administrative-asset tests
- Retention (Behaltensfrist): The recipient must hold and continue the business for 5 or 7 years. A sale, cessation, or harmful restructuring in this period can lead to partial or full clawback.
- Wage-sum test (Lohnsummenregel): For businesses above the small-employer carve-out, the cumulative wage sum must reach the required percentage; shortfalls trigger pro-rata clawback. Group and foreign payrolls may require consolidation.
- Administrative assets (Verwaltungsvermögen): Passive assets (e.g., securities portfolios, excess liquidity beyond working-capital needs, non-operating real estate) are limited. “Young” passive assets acquired shortly before the transfer are treated harshly.
- Debt allocation: Only operative business debts reduce the qualifying value; financing of passive asset stacks is scrutinized.
Valuation of companies & shares (BewG / IDW S 1)
Tax valuation basics
- For inheritance tax, non-listed shares and businesses are valued under the Bewertungsgesetz, often via the simplified earnings method.
- Listed shares are valued at market price around the valuation date.
- Real estate inside the business follows real-property valuation rules (income or comparables) and then feeds into the enterprise value.
Commercial valuations in practice
- For transactions, fairness opinions, or litigation, a full IDW S 1 (DCF/earnings-based) report is common.
- Where the tax value appears non-market, an expert opinion can support a challenge with the tax office.
Clawbacks: harmful events, excess distributions, restructuring
- Harmful disposals/cessation: Selling essential business assets, shutting down, or moving the business without continuity can trigger relief clawback during the retention period.
- Excess distributions: Draining operative liquidity to build passive asset stacks may breach administrative-asset limits post-transfer.
- Restructuring: Conversions, mergers, and spin-offs are possible, but must respect relief conditions (continuity of operations, employment, and asset tests).
Large transfers (>€26m): reduction model vs. needs test
For particularly large acquisitions by one recipient (benchmark: circa €26 million), special anti-concentration rules apply. Typically, you can choose between:
- a reduction model that scales down the relief progressively as the acquisition value rises, or
- a needs-based test (Verschonungsbedarfsprüfung) demonstrating that the beneficiary cannot reasonably pay the tax from their non-business net assets.
Cross-border: situs, shareholdings, PEs & foreign-tax credits
Situs & taxing rights
- Operating assets / permanent establishments (PEs): Typically taxed where the PE is located; Germany taxes worldwide if decedent or heir is an Inländer, but credits may apply.
- Shares (intangibles): Situs is generally at the shareholder’s residence for German rules, but foreign states may tax their domestic corporations on death—creating overlaps.
- Treaties: Where a bilateral inheritance/estate tax treaty exists (e.g., Germany–USA, Germany–Switzerland), treaty allocation overrides domestic rules.
Foreign-tax credit & coordination
- Germany may grant a credit for foreign death duties on the same assets, usually capped at the German tax attributable to those assets.
- If the other country has no death duties, there is generally no credit—plan liquidity accordingly.
- Document foreign assessments and payments early to support credit claims.
Practical planning ideas (before & after death)
Before death
- Shareholding thresholds: Pooling agreements to reach ≥25% can unlock relief for corporate shares.
- Balance sheet hygiene: Reduce administrative assets and unjustified cash piles; align financing with operations.
- Payroll & governance: Stabilize headcount and wage-sum trajectory; document HR plans to hit the 5/7-year tests.
- Succession structures: Staged gifts within 10-year cycles; voting trusts, family charters, and buy-sell clauses.
After death / during retention
- Track wage-sum and organizational changes; avoid harmful disposals.
- Restrict excess distributions that convert operative funds into passive stacks.
- Use installments/deferral where hardship applies (case-by-case under tax procedural rules); plan liquidity with banks early.
ℹ️ Click a question to reveal the answer:
What’s the difference between the 85% and 100% relief?
Both apply to qualifying business assets, but the 100% option has stricter entry and monitoring conditions (longer retention, higher wage-sum). Breaches cause proportionate clawback.
Do small corporate shareholdings qualify?
Relief for corporate shares usually requires a ≥25% stake per recipient. Binding pooling agreements can combine stakes to meet the threshold.
When does the wage-sum test apply?
Generally if the business has more than a small number of employees (e.g., >5). The total wage-sum over 5/7 years must reach 400%/700% respectively.
What are “administrative assets” and why do they matter?
They are passive assets (e.g., portfolios, non-operating real estate, excess liquidity). Relief is limited or denied if their share exceeds strict quotas—especially for the 100% option.
How are >€26m transfers handled?
You can either accept a scaled-down relief or apply for a needs-based test proving insufficient private means to pay the tax. We model both and document liquidity.
How do cross-border businesses and shares interact with German ErbSt?
Germany may tax worldwide acquisitions if decedent/heir is an Inländer. PEs are typically taxed where located; shares are intangibles and may be taxed in multiple states. Treaties and foreign-tax credits coordinate exposures.
Author
Disclaimer: This article is general information, not tax or legal advice. Relief conditions and thresholds are technical and change over time. Contact us for current ErbStG guidance before filing or restructuring.