Germany has a talent for turning technical tax debates into existential national questions. The latest example? Whether heirs who inherit family businesses should pay substantially more Erbschaftssteuer. Monika Schnitzer, chair of the prestigious Wirtschaftsweisen (Council of Economic Experts), has thrown a match into this powder keg by declaring the current system fundamentally unjust. Her argument is simple: private wealth gets hammered by taxes while business empires slip through almost unscathed.
The controversy isn’t just academic. It cuts to the heart of what Germans value more, social equity or the Mittelstand engine that powers their economy.
The Core Injustice: Two Tax Systems for Two Types of Wealth
Schnitzer’s central complaint strikes at a bizarre quirk of German tax law. When you inherit cash, stocks, or property from your parents, the Finanzamt takes a substantial bite. But when you inherit a company, complete with factories, employees, and revenue streams, you often pay a fraction of that amount, sometimes nothing at all.
“Das Geldvermögen privater Haushalte wird unverhältnismäßig viel höher besteuert als das Betriebsvermögen von vererbten Unternehmen”, Schnitzer told the Rheinische Post. The translation doesn’t capture the quiet fury in her words: household wealth gets disproportionately taxed compared to business assets.
The numbers back her up. While private inheritances face standard rates up to 50% beyond certain thresholds, business assets enjoy massive exemptions. The rationale has always been protecting jobs and preventing forced sales. But Schnitzer argues this logic collapses when you look at what’s actually being passed down.
The Private Jet Problem: When “Business Assets” Include Art and Yachts
Here’s where the debate gets spicy. Schnitzer didn’t just target factory owners. She specifically called out the luxury baggage that often comes with business inheritances: “Da finden sich neben liquiden Konten auch Gemälde, Oldtimer oder der Privatjet, gerade wenn es um sehr hohe Erbschaften geht.”
The image of a grieving heir struggling to keep the family jet flying resonates differently than the traditional narrative of a small business owner fighting to protect jobs. Many international residents in Germany express frustration that the system seems designed to protect dynastic wealth rather than genuine entrepreneurship. The prevailing sentiment is that tax rules written for the local bakery are being exploited by industrial dynasties.
The OECD has repeatedly urged Germany to tax capital and inheritance more heavily, arguing it would actually boost economic growth by reducing distortions. Yet the political resistance remains fierce.
The Constitutional Court Wildcard
Schnitzer isn’t waiting for political consensus. She’s betting the Bundesverfassungsgericht will do the heavy lifting, telling the Rheinische Post she expects the court to overturn the current preferential treatment of business assets in a ruling expected next year.
This isn’t wishful thinking. Germany’s highest court has a track record of demanding tax system reforms when it detects constitutional violations, particularly around equal treatment principles. If Schnitzer’s prediction holds, the government would be forced to rewrite inheritance tax law from scratch.
The potential fallout? Family businesses could face massive new tax bills overnight, potentially triggering fire sales of companies that have existed for generations. Critics warn this would devastate the Mittelstand backbone of German industry.
The Tax Avoidance Machinery Already in Motion
While politicians debate principles, wealthy families aren’t sitting idle. Many have already deployed sophisticated structures to shield assets from any potential tax increases.
The most controversial tool? Familienstiftungen (family foundations). These vehicles allow assets to be transferred across generations while minimizing tax exposure. As one observer noted, the newest trick involves structuring these foundations so that heirs pay virtually nothing, often by exploiting “hardship” provisions intended for genuinely struggling businesses.
The numbers from Bavaria raised eyebrows nationwide: approximately €7.4 billion in tax relief granted to around 100 individuals over four years, ostensibly due to “Bedürftigkeit” (financial need). To put that in perspective, that’s enough to fund Bürgergeld fraud prevention for 74 years. The optics are terrible, billionaires receiving hardship exemptions while ordinary taxpayers face rising burdens.
This contrast highlights the core tension: while some heirs struggle to maintain modest family properties in eastern Germany, others navigate a system that seems designed for wealth preservation.
The Economic Reality Check
Proponents of higher taxation argue that Germany’s aging demographics and infrastructure needs demand more revenue from those who can afford it. They point out that many family businesses aren’t the vulnerable startups of popular imagination, they’re mature, profitable enterprises that can easily service tax debts.
The counterargument is equally forceful. Family businesses operate with longer time horizons than publicly traded companies. They invest through downturns, maintain employment in struggling regions, and preserve technical know-how. Load them with inheritance tax burdens, and you risk turning them into acquisition targets for international private equity firms that care only about quarterly returns.
The debate essentially asks: do we want German companies controlled by German families with local commitments, or by global capital markets?
What This Means for You (Even If You’re Not a Millionaire)
You might think this doesn’t affect you if you’re not inheriting a factory. Think again.
If the Constitutional Court forces a tax overhaul, the government will need revenue from somewhere. History suggests middle-class wealth could face higher burdens too, through reduced exemptions, lower thresholds, or higher rates on property and financial assets.
International residents in Germany should pay particular attention. Unlike German citizens who might have lifelong exposure to the system, expats often find themselves unexpectedly caught by German inheritance tax when a relative passes away. The current rules already create headaches for foreign assets, a more aggressive system could make cross-border estate planning even more complex.
The practical advice: if you have significant assets, or expect to inherit them, review your structure now. The window for optimizing under current rules may be closing faster than you think.
The Deeper Question: What Kind of Capitalism?
Beyond the technical details lies a fundamental question about Germany’s economic model. The post-war social market economy promised both prosperity and fairness. But as wealth concentrates and asset prices soar, that compromise is fraying.
Schnitzer’s intervention reflects a broader academic consensus: the current system isn’t just unfair, it’s economically inefficient. When labor gets taxed at 40-50% (including social contributions) while inherited wealth faces minimal levies, you create perverse incentives. Why work when you can wait for your parents to die?
Yet changing this means confronting powerful interests. Family business associations wield enormous political influence. They frame any reform as an attack on jobs and German competitiveness. And they have a point, forced sales of industrial assets to foreign buyers would have real economic consequences.
The Likely Compromise
If history is any guide, the eventual outcome will be messy. Germany rarely resolves such conflicts with clean solutions. Instead, expect:
- Higher taxes on large business inheritances, but with thresholds that protect genuine Mittelstand companies
- Tighter rules on family foundations, closing the most egregious loopholes
- Grandfather clauses that protect existing structures, creating a two-tier system
- Increased exemptions for businesses that maintain employment levels
- More complex paperwork for everyone, because German tax reform always means more bureaucracy
The Constitutional Court may force the issue, but the political system will water it down. The result? A system that’s slightly more equitable but significantly more complicated.
Actionable Takeaways
If you’re a business owner:
– Review your succession plan immediately. Consider whether transferring shares before any reform makes sense.
– Explore legitimate structures that lock in current tax treatment, but avoid aggressive avoidance schemes that might be retroactively targeted.
If you’re a potential heir:
– Understand that the tax-free allowance (currently €400,000 for children) might decrease or face stricter conditions.
– Don’t assume business assets will always receive preferential treatment. Diversify your inheritance expectations.
If you’re an international resident:
– German inheritance tax applies to worldwide assets if either the deceased or heir is German tax-resident. Get professional advice, especially if you expect cross-border inheritances.
– The distinction between business and private assets is even more critical for expats, as foreign business interests might be treated differently.
For everyone else:
– This debate signals a broader shift toward taxing capital more heavily. Review your investment strategy and consider tax-efficient vehicles like Riester-Rente or Bausparverträge that remain politically protected.
The German inheritance tax debate isn’t just about rich heirs and their jets. It’s about how Germany funds its future while preserving what makes its economy unique. The Constitutional Court may force a decision, but the real question is whether the political system can find a solution that doesn’t destroy the Mittelstand in the name of saving it.
As with most German policy debates, the final result will likely satisfy nobody completely, which, in Germany, is often considered the hallmark of a fair compromise.
