Inheritance tax is the most expensive tax you can pay "by default". On a €5 million business, tax class I triggers up to 30% in tax — €1.5 million drained from the business per generation. §§ 13a/13b ErbStG (German Inheritance Tax Act) offer substantial exemptions — but they demand preparation.
The two exemption options
Standard exemption (85% tax relief)
85% of the inheritance/gift tax on qualifying business assets is waived. The remaining 15% is taxable. Requirements:
- Administrative assets ratio ≤ 90% (otherwise no relief at all)
- Payroll requirement: 5-year total payroll ≥ 400% of the baseline payroll
- Minimum holding period of 5 years
Optional exemption (100% tax relief)
Full tax exemption in exchange for these stricter requirements:
- Administrative assets ratio ≤ 20%
- Payroll requirement: 7-year total payroll ≥ 700% of the baseline payroll
- Minimum holding period of 7 years
Breach the minimum holding period — through sale, discontinuation or excess withdrawals — and you lose the exemption retroactively (pro rata over time in the case of a sale). The inheritance tax is then assessed after the fact and falls due immediately; late-payment interest under § 233a AO does not apply to inheritance tax. However, if the tax was deferred under § 28 ErbStG, deferral interest of 0.5% per month (6% per year, § 238 AO) accrues after the interest-free first year. Example: an exemption worth €1 million can, if you sell after 4 years, result in a six-figure back payment due immediately.
Which assets qualify for relief?
Under § 13b ErbStG, the following qualify:
- Shares in German corporations (minimum 25%)
- Shares in corporations resident in the EU/EEA (minimum 25%)
- Agricultural and forestry assets
- Business assets of a partnership (KG, OHG, GmbH & Co. KG)
What does not qualify (administrative assets)?
Caution: if the share of administrative assets is too high, the exemption fails. Typical administrative assets:
- Property let to third parties (except where tied to the operating business)
- Securities and comparable receivables
- Works of art, precious metals, coins
- Cash and receivables exceeding 15% of the company's value
The most powerful lever: structuring 5 years in advance
Structure 5 or 7 years before the planned handover and every lever is still available:
- Reduce administrative assets: redirect excess liquidity into operating assets (machinery, equity stakes, working capital).
- Secure payroll levels: keep headcount at a solid level before the handover to meet the payroll requirement.
- Optimise shareholdings: stakes below 25% cannot be transferred with relief — pool or restructure them where necessary.
- Use allowances more than once: personal tax-free allowances reset every 10 years. Gift early, and you can use two full cycles.
Allowances in detail
| Recipient | Allowance (every 10 years) |
|---|---|
| Spouse/partner | 500.000 € |
| Child (per parent) | 400.000 € |
| Grandchild | 200.000 € |
| Parents (on inheritance) | 100.000 € |
| Siblings, nieces/nephews | 20.000 € |
Common mistakes in practice
- Starting too late: 1–2 years before a generational handover is not enough for serious structuring.
- Overlooking cash as an administrative asset: €2 million sitting in a bank account can sink the exemption.
- Ignoring payroll requirements: cutting headcount before the handover puts the exemption at risk.
- Leaving valuation questions unresolved: the tax value can differ significantly from the market value — choose your valuation method.
More than 20 years advising entrepreneurs, investors and family businesses. Reserved tax services are provided by our partner tax firm, TABAK Steuerberatung.
Firm Profile →Prepare your succession — properly structured.
We typically work with clients for 5–7 years on tax-optimal succession — with an exemption roadmap, administrative assets review, cash-pool strategy and notary support.