German inheritance tax benefit for capital companies: freedom of establishment applies
The following case was recently brought before the European Court of Justice (ECJ). Ms Scheunemann (residing in Germany) obtained an inheritance from her father (also residing in Germany) in 2007. This inheritance included a wholly owned interest in a Canadian capital company. The dispute is about whether the German business succession facility in the inheritance tax applies to the inheritance of this interest.
German business succession facility
The German “Finanzambt” has set the inheritance tax due on the inheritance at EUR 299,381. The business succession facility had not been taken into account, since this solely applies to companies established in or controlled from Germany or another Member State of the European Union or the European Economic Area. If the business succession facility were applied, however, then the value of the shares in the Canadian company would - in short - first be reduced by an exempted sum of EUR 225,000. Next, for German inheritance tax purposes 65% of the remaining value would be taken into account.
Freedom of establishment or free movement of capital?
Ms Scheunemann takes the position that the German business succession facility applies to the acquisition of interest in the Canadian company. She has filed a notice of objection against the decision of the Finanzambt. On appeal, the Bundesfinanzhof ruled that the freedom of establishment does not apply to the situation at hand. Its consideration is that, irrespective of the nature of inheritances, their treatment falls under the treaty provision concerning the free movement of capital. The “Bundesfinanzhof” then asked the ECJ whether the German regulation (within the free movement of capital) can distinguish between a capital company that is established in Germany, or is controlled from there, and a company in a third country outside the European Union or the European Economic Area (in this case Canada).
The ECJ ruled that the tax treatment of inheritances basically falls under the free movement of capital. In addition, however, it ruled that the freedom of establishment as yet applies in the event of a “national statutory regulation that solely applies to participations with which clear control over the decisions of a company can be exercised and with which the activities can be determined”. According to the ECJ this holds true in this case, since the application of the German regulation requires that an interest of more than 25% is held, while subsequent to the acquisition the heir must continue to be the owner of those shares for at least another five years.
Considering that Ms Scheunemann held a wholly owned interest in the Canadian company, the ECJ ruled that Ms Scheunemann can exercise significant control over the company’s decision-making. Hence, the business succession regulation need not be tested against the free movement of capital, but against the freedom of establishment. Since the freedom of establishment does not apply to companies established in a third country, the business succession facility cannot be applied in this case.
Source: ECJ 29 July 2012, C-031/11