A few years back, reporting by Süddeutsche Zeitung revealed that hundreds of wealthy Germans had paid only about five percent tax on a combined sum of €31 billion that they had inherited that year.
Five percent is of course far less than the 30 to 50 percent tax rate you might have expected from just a cursory glance at German inheritance tax (Erbschaftssteuer) rules. But the devil is in the details, and the wealthiest among us can afford to pay for tax advisors who know all the loopholes.
Under Germany's current tax code there are big advantages for anyone who inherits a business, or parts of a company -- and this is a major point of political contention. Now the Federal Constitutional Court is hearing a case on the matter, and is expected to clarify if these tax privileges for company heirs are compatible with the Basic Law.
The current case, which began on Tuesday in Karlsruhe, was brought by a man who had inherited private assets from his aunt.
Because they were not business assets, they were taxed in full, and in his suit he is claiming that he was unconstitutionally disadvantaged compared to company heirs.
The case can be expected to drag on for several months, but the verdict may ultimately decide if Germany's current inheritance tax rules are legal -- or if the tax advantages for company heirs need to be reassessed.
In the meantime, the issue is already a major sticking point between officials at the top levels of German leadership.
So – as the country awaits a the ruling that could see inheritance tax rules rewritten – here's an overview of the current rules, which apply to all residents in Germany.
What are the basic rules and tax rates on inheritance?
In principle, anyone who receives assets through inheritance -- whether cash, a house, a company, securities, jewellery or company shares -- is liable to pay tax in Germany.
This is true for German citizens as well as foreign residents, and generally even applies to assets you inherit from overseas while living in Germany.
The amount owed depends on the degree of kinship and the value of the inheritance, with tax rates ranging from seven to 50 percent.
The basic idea is that the more you inherit and the more distantly related you are to the deceased, the more taxes you have to pay.
EXPLAINED: The rules around inheritance tax in Germany
What are the exceptions?
There are pretty significant basic allowances for spouses (up to €500,000) and children of the deceased (up to €400,000).
You can also inherit your parents' house tax-free if you move in for at least ten years, and the living space does not exceed 200 square meters.
According to the Federal Statistical Office, most inheritances and gifts fall within these exemption amounts.
The above court case, however, is concerned with tax advantages for people who inherit entire businesses or parts of companies. In Germany, 85 percent of business assets can be exempt from inheritance tax if the heir continues the business for at least five years. A complete exemption can be applied for if you keep the assets for more than seven years and meet other requirements.
These benefits only apply to assets of less than €26 million. Interestingly, for larger firms, the benefits can sometimes be even more generous.
What's the debate?
Arguing against the current tax rules in the present case is Julia Jirmann of the Tax Justice Network, who says that untaxed inheritances and gifts play an increasingly important role in wealth accumulation – and growing inequality in Germany.
The German Trade Union Confederation (DGB) also finds the privileges "unfair" and calls for their abolition. DGB's deputy chairman points out that in the current year alone, these inheritance tax exceptions are estimated to cost Germany almost nine billion euros in lost income.
"This money is urgently needed for important investments in education, infrastructure and social security," argues the DGB.
On the other side of the argument is the Federation of German Industries (BDI), which says that these tax privileges don't necessarily equate to liquid assets. The association argues that business assets are often tied up in the long term, for example in machinery or buildings.
The tax advantages are therefore not a personal privilege for the heirs, but serve to protect corporate entities.
What is the political debate around inheritance tax?
While the court decides on the legality of current rules and exemptions, Germany's black-red government -- comprised of the conservative Union (CDU/CSU) and centre-left Social Democrats (SPD) -- has already exchanged some words about a potential reform.
Both sides agree that inheritance tax is in need of reform, but they disagree significantly on what that reform should look like.
The SPD would like to simplify the rules, close some loopholes and raise the basic allowances for individuals.
For companies, the SPD proposes an allowance worth five million euros, along with options for deferring payments to prevent potential business closures. The plan would be expected to significantly increase tax revenue for Germany.
READ ALSO: Will Germany's inheritance tax law see a serious shake-up this year?
The Union rejects these proposals, with its Bavarian wing (the CSU) advocating instead to let inheritance tax be determined at the state level.
On Monday, the Federal Constitutional Court had heard a corresponding lawsuit by the Bavarian state government.
Proponents of this plan argue that states should be free to adjust these benefits as they see fit. Critics contend that wealthy states like Bavaria could then afford to implement generous tax advantages, which would exacerbate the flight of wealthy families from the states that need investment the most.
With reporting by DPA.
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