An international comparison of inheritance taxes

In Germany, a debate is currently intensifying about the role of inheritance tax in the tax system and how it should be structured. On the one hand, the focus is on generating tax revenue in the face of shortfalls in state budgets. On the other hand, the focus is on ideas regarding a fair distribution of wealth.

A further point is that Germany’s Federal Constitutional Court is expected to rule on the exemption of certain business assets from inheritance taxation (ie. the payroll rule and exemption requirement test) in the near future.

Inheritance and gift tax are both particularly relevant to family businesses. The resulting burden has an impact on the financial situation of family businesses and influences the decisions of potential heirs in favour of or against continuing the business.

In order to ensure that the debate on the appropriate taxation of family businesses is no longer detached from the competitiveness of Germany as a business location, an international comparison of inheritance tax regulations appeared to make sense. This is the first time that an international comparison of inheritance tax regulations has been published in this rigour and scope, and it is based on a simulation model developed by the economic research institute ZEW – Leibniz Centre for European Economic Research in Mannheim.

Below are the most important findings from the study:

• Of the 33 countries analysed, 14 do not levy an inheritance tax at all.

• A further 12 countries exempt spouses and, where applicable, children from the inheritance tax (tax rate of zero per cent).

• A total of 11 countries offer preferential treatment when heirs inherit companies in general or family businesses in particular.

• Germany stands out internationally for its comparatively high level of taxation. Germany has the highest burden when bequeathing assets to a spouse and the third highest when the heir is a child.

• Payment facilities (deferral or payment by instalments) are granted in 17 countries.

Other important findings:

• The share of inheritance tax as a percentage of total tax revenue has risen sharply in Germany over the past 20 years, most recently amounting to 1.1 per cent. The tax revenue from inheritance tax currently plays a minor role in Germany and in the majority of the countries considered. In most of the countries analysed, the tax has lost relevance or has been eliminated entirely.

• Due to demographic trends and asset value development, German inheritance tax revenue is expected to double to 14.6 billion euros by 2050. The total value of inheritances to be taxed is estimated at an average of 290 billion euros.

• The empirical evidence shows that inheritance taxes can help minimise absolute wealth inequality over the long term. However, it should be noted that inheritance tax influences the behaviour of economic entities, for example the investment propensity of company owners, the willingness of their spouses or children to take over the company or a decision to sell the company. The burden of inheritance tax can thus have an indirect effect on employment, wages or income from other types of tax.

• Tax planning is not taken into account in this study due to the modelling assumptions. Empirical studies show that tax planning in the area of inheritance tax is common in Germany and internationally. Reactions by taxable entities include optimising the timing of transfers and shifting assets in order to gain tax advantages. Even within the current tax law framework, there are various options available to significantly reduce the tax burden. However, these are only available to a limited extent, particularly to SMEs, and are often accompanied by legal uncertainties or the loss of management control.