Inheritance tax + company real estate: New ruling!

The Federal Fiscal Court has issued a far-reaching ruling for heirs of business assets. Does this mean that real estate is eligible for preferential inheritance tax treatment or not?

Frankfurt am Main

October 14, 2024

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No inheritance tax advantages for parking garages (and hotels, guesthouses, campsites, office centers, self-storage facilities, shopping centers?)

The transfer of business assets and investments in corporations with a shareholding of at least 25% is significantly favored with regard to inheritance and gift tax. In the best case, the tax burden can be avoided entirely.

However, so-called administrative assets included in business assets are excluded from this benefit. This includes, among other things, "real estate, parts of real estate, land rights, and buildings leased to third parties for use."

Until now, the question of whether a lease of use leading to administrative assets also exists if, according to income tax principles, it is no longer classified as mere asset management but as an originally commercial activity has been unclear. The tax authorities have so far generally denied this only in the case of accommodation establishments such as hotels, guesthouses, or campsites. In contrast, some specialist literature takes the view that originally commercial rentals should generally not lead to administrative assets—even beyond the accommodation establishments favored by the tax authorities.

The Federal Fiscal Court has now rejected such a broad interpretation of the law in its decision of 28 February 2024 (case number II R 27/21).

In the case at issue, the taxpayer was the sole heir of his father (testator), who died in 2018. The estate included the testator's sole proprietorship. This comprised a property developed with a parking garage and a gas station. The testator had originally operated the parking garage, which was open 24 hours a day, himself. Starting in the beginning of 2000, he leased it to the taxpayer for an indefinite period. The income from the lease resulted in commercial income for the testator. The gas station, which accounted for 7.12% of the total gross area of the developed property, was leased to a limited liability company (GmbH) until the end of 2018. The tax office therefore assumed that the assets constituted administrative assets and therefore did not qualify for the inheritance tax relief for business assets.

The Federal Fiscal Court confirms the tax administration's view. First, the court confirms that in this case, the parking garage and the gas station undoubtedly constituted "property or part of a property made available to a third party for use." In this respect, the transfer to any person other than the transferor of use is covered. The legal basis for the transfer of use is irrelevant to the question of whether it is classified as administrative assets; it can be made for consideration under a rental or lease agreement or free of charge under a loan agreement. Furthermore, the term "transfer of use" encompasses not only long-term but also short-term transfers of use, such as the short-term transfer of parking spaces to parkers in the case in dispute.

The Federal Fiscal Court also sees no reason for a restrictive interpretation of the provision to cases in which the transfer of use of real estate no longer constitutes mere asset management for income tax purposes, but rather a genuinely commercial activity. It was indeed the legislature's stated intention not to exclude from the tax relief business assets that directly serve a business and simultaneously maintain jobs, and therefore, especially in the case of accommodation establishments, transfer of use should not result in administrative assets. However, this is not reflected in the wording of the law.

According to the clear wording of the law, only the following cases are exempt from the exclusion regarding the transfer of property to third parties:

• the provision of apartments as part of a commercial business operation,

• the provision of land for the sale of own products and goods within the framework of supply contracts,

• the transfer of land for agricultural and forestry use.

Conversely, according to the legislative decision, any other transfer of use of land, e.g. rooms in accommodation establishments, rooms in restaurants and parking spaces in parking garages, should not be favored.

TaxPro recommendation:

The implications of this ruling are not yet fully clear. It is clear that the provision of parking spaces for use within the framework of parking garage operations results in non-privileged assets. If this argument is consistently applied to other comparable cases, it affects a large number of other businesses. In particular, this includes accommodation establishments that have previously benefited from tax treatment, such as hotels, guesthouses, and campsites. But it also applies to business and office centers, self-storage companies, and shopping centers, for example. It remains to be seen how the tax authorities will react to this ruling.

In individual cases, it may be necessary to carefully examine whether the broader perspective applied by the tax authorities to date – particularly with regard to hotels and other accommodation establishments – should still be used for anticipated inheritances.