Corona pandemic - undesirable tax side effects


In Germany, around 814,000 people currently are employed in the automotive industry, which is around three percent less than in the same month of the previous year. Hildegard Müller, President of the German Association of the Automotive Industry (VDA), said: “Of the 814,000 employees, one out of two is currently working short-time." (Source: www.autozeitung.com, 29 July 2020)

Nevertheless, the demand for business transfers in the context of succession in family businesses remains high in the sector. According to estimates by the Institut für Mittelstandsforschung (IfM), the number of pending successions in medium-sized companies across all sectors amounts to around 150,000 per year in the period 2018 to 2022 (source: Institut für Mittelstandsforschung, “Business successions in Germany 2018 to 2022”, Daten und Fakten Nr. 18, Bonn, February 2018).

The fact that both effects may influence each other in a negative way for the entrepreneurs is often overlooked.

The fiscal environment

The transfer of a business free of charge is basically a transaction subject to inheritance tax, but there are a number of tax advantages associated with it. Substantial parts of the business assets are completely or almost completely (85%) exempted from taxation. The same applies to the transfer of shares in partnerships and corporations (the latter, however, only if the transferor holds more than 25% of the shares in the company). The so-called management assets, such as rented real estate, cash, receivables or assets with a private character such as vintage cars, yachts or private aircraft are not eligible for preferential treatment.

Important limitation: If the company successor wishes to retain the tax advantages, he is obliged to meet two further conditions for five years, or even seven years in the case of full tax exemption:

  • Firstly, the tax advantage is granted under the condition that during the five- or seven-year period, respectively, the wage costs of the acquired company remain, on average, roughly at the level of the last five years before the transfer.
  • Secondly, the acquirer is obliged to keep the acquired company during this period, which means in particular that he may not to sell it to a third party. The same applies, however, to a discontinuation of operation or - note! - the insolvency of the transferred company.

If one of the conditions is not met, the preferential treatment ceases to apply retroactively and pro rata temporis, i.e. the part of the eligible asset that was previously tax-exempt is retroactively taxed, including interest at a rate of 6% p.a.

Neither of these two conditions is affected by the promotion and support measures to mitigate the corona-related consequences for German medium-sized enterprises. If, for example, the wage total of the transferred company falls below the relevant reference values as a result of short-time working that has become necessary, the previously avoided inheritance tax will become due retroactively.

And what is worse still: if the enterprise transferred can no longer be continued as a going concern due to the crisis caused by the pandemic and becomes insolvent, the entrepreneur affected may not only suffer the economic loss but also an additional tax loss!

Sample calculation

Entrepreneur U transferred his company in 2016 (cut-off date: 1 January 2017, 0.00 hours) to his successor N. N has made use of the 85% taxable base discount (Verschonungsabschlag) for inheritance tax purposes. After a boom period at the end of the 2010s, corona-related short-time work and job cuts led to a noticeable reduction in wage costs.

The subsequent calculation of the resulting inheritance tax effects will be based on the following assumptions:

  • Enterprise value for inheritance tax purposes:                          € 10.0 million
  • Tax rate inheritance tax (acquisition between € 0.6 and € 6.0 million): 19%
  • Taxable base discount (85% of the enterprise value):    ./.         € 8.5 million
  • Initial wage total (average of the years 2012 - 2016):                 € 12.0 million
  • Minimum wage total (400% of the initial wage total):                  € 48.0 million
  • Actual wage total for the years 2017 - 2021:                              € 36.0 million

Due to the reduction in wage costs after the transfer, the taxable base discount is reduced pro rata. This reduction amount is calculated as follows:

     Wage total shortfall (€ 48.0 million ./. € 36.0 million =)     12,0 x 100
     _____________________________________________   _________

                Minimum wage total €                                                    48,0


The reduction of the taxable base discount therefore amounts to:

                         € 8.5 million x 25% = € 2.125 million.

The final taxable base discount N may take advantage of amounts to:

               € 8.5 million ./. € 2.125 million = € 6.525 million

N therefore has to expect a "corona-related” subsequent inheritance tax payment in the amount of €403,750. If N would have to file for insolvency for the acquired company in 2020, even 40% of the claimed taxable base discount (= € 3.4 million) would no longer apply, since only three full years, i.e. 60%, of the five-year holding period have expired. The back taxes would rise to € 646.000!


If the transfer agreements are structured accordingly, the undesirable corona-related side effects described can be avoided by cancelling the transfer of the company with retroactive tax effect. Like the gift at that time, the retransfer will also require a contract to be notarised, including the associated costs. The inheritance tax paid as a result of the transfer of the business is refunded, and the additional tax due to non-compliance with the wage totals or holding period does not accrue. At a later date, for example when the economic situation of the company has stabilised, the transfer to the successor can be repeated.

However, a precondition for these measures to be taken is that these options were already included in the original transfer contract. Here it is worthwhile to have a tax advisor specialising in inheritance tax issues take a look at the matter.


Family businesses experiencing financial difficulties due to the coronavirus crisis may risk unexpected tax trouble. If such a company was the subject of a corporate succession in the past 5 - 7 years, there is the risk of subsequent inheritance tax payments, which can quickly reach a 6- or even 7-digit figure. An inheritance tax specialist should check whether these undesirable tax side effects of the coronavirus pandemic can still be averted.


Prof. Dr Eberhard Kalbfleisch