Verschonungsregelung: How Business Assets Pass Tax-Free in a German Handover

Anyone gifting or bequeathing a business in Germany can transfer 85 or even 100 per cent of the business assets free of tax — provided they meet the conditions of §§ 13a and 13b ErbStG (the German Inheritance and Gift Tax Act). Break those conditions, and the tax falls due retrospectively.

How we guide owners through business succession — from the first decision to the handover — is set out on our services page.

The Verschonungsregelung, the relief that shields business assets from inheritance and gift tax, is the fiscal foundation of almost every family-internal handover in the German Mittelstand. It is not a formality. Its deadlines run for years after the transfer and tie the successor to conditions that many owners only come to understand once they have already been breached. The German market picture is set out under succession in Germany. This article deals with the tax side of a transfer made for no consideration. It is not a substitute for tax advice.

What the Verschonungsregelung is

Without special rules, transferring a company by gift or inheritance would trigger tax on the full value of the business. For a company worth tens of millions, that is a burden most successors could only meet by selling the business or bleeding it dry. Preventing exactly that is the point of the legislation.

§ 13a ErbStG therefore exempts qualifying business assets to a large extent — subject to conditions designed to ensure that the business is genuinely continued and that jobs are preserved. The exemption is not a gift without obligation. It is a trade: tax relief in exchange for continuity.

Regelverschonung or Optionsverschonung

The successor chooses between two variants — the standard relief (Regelverschonung) and the full relief (Optionsverschonung).

	Regelverschonung	Optionsverschonung
Exempt from tax	85 %	100 %
Holding period (Behaltensfrist)	5 years	7 years
Payroll test (more than 15 employees)	400 % of the base payroll over 5 years	700 % over 7 years
Requirement on administrative assets	normal	stricter

The standard relief exempts 85 per cent. For the remaining 15 per cent there is a sliding deduction of up to EUR 150,000, which further softens the tax burden for smaller businesses. The full relief exempts everything, but demands longer periods, higher payroll thresholds and a clean balance sheet with only a small share of administrative assets.

The choice is binding. An owner who opts for the full relief and later breaches its stricter conditions cannot fall back on the standard relief. This decision belongs in a spreadsheet, not in a gut reaction that 100 sounds better than 85.

What counts as qualifying assets — and what does not

Qualifying assets are the productive ones: the operating business, its machinery, inventories, receivables and the land it uses in its own operations. What does not qualify is Verwaltungsvermögen — administrative assets under § 13b ErbStG, essentially everything a private asset manager could equally hold: land let to third parties, securities, works of art, and cash and cash equivalents above an allowance.

There is a hard cut-off. If administrative assets make up 90 per cent or more of the total, the relief falls away entirely. Below that threshold, administrative assets are still taxed in principle as though they had been transferred privately.

In practice this means a business with high liquidity, a substantial securities portfolio or let property on its balance sheet should have its balance sheet structure reviewed before the transfer, not after. What decides the outcome is the composition of the assets on the transfer date, and that can be shaped with lead time — never retrospectively.

The payroll rule

The relief is tied to preserving jobs, measured by the Lohnsumme, the aggregate payroll. In businesses with more than 15 employees, total wages paid over five years must reach at least 400 per cent of the base payroll under the standard relief, or 700 per cent over seven years under the full relief.

Businesses with up to five employees are exempt from the payroll test; between those thresholds, graduated requirements apply. If the minimum payroll is missed, the relief falls away proportionately — in the ratio of the shortfall.

For the successor this is a real commercial constraint. Cutting headcount in a downturn, relocating, selling off part of the business — any of these can trigger a tax bill years after the handover, long after anyone was still watching for it.

The holding period: how quickly the relief unwinds

Alongside the payroll test runs the Behaltensfrist, the holding period: five years under the standard relief, seven under the full relief. If the successor sells the business or gives it up within that window, the relief falls away retrospectively and pro rata. Excessive withdrawals — drawings well above profits — can also put the relief at risk.

This links the tax question directly to succession planning. A successor who takes on the business already suspecting they will want to sell in three years is inheriting a ticking tax liability along with the relief. In such cases an orderly sale rather than a gift is often the more honest route — and what the business would be worth in that scenario is a question for a company valuation.

Large transfers above EUR 26 million

Full relief applies to qualifying assets up to EUR 26 million per acquisition. Above that, the relief percentage tapers off step by step. Alternatively the acquirer can apply for a Verschonungsbedarfsprüfung, a needs test, under which they must disclose their available private assets and use them to pay the tax. For large family businesses, the handover therefore becomes a multi-year planning project with its own depth of advice — and one more reason to start early.

And in Austria?

This topic does not exist in the same form in Austria: inheritance and gift tax were abolished there. Austrian handovers turn instead on Grunderwerbsteuer (real estate transfer tax) where property is involved, on the Gewerbeberechtigung (the trade licence) and on the structure of the transfer agreement. The overview is set out under succession in Austria.

The best succession begins years before closing. Talk to IGCP Capital Partners early and in confidence — independent, discreet, and on equal terms.

FAQ

Does the relief also apply to a lifetime gift?

Yes. §§ 13a and 13b ErbStG apply equally to inheritance and to gifts. A lifetime gift has the advantage that the transfer date and the composition of the assets can be planned — and that the personal allowances (EUR 400,000 per child) can be used afresh every ten years.

What happens if I narrowly miss the payroll threshold?

The relief does not fall away entirely, but proportionately, to the extent of the shortfall. Even so, a tax charge arises on a value dating back years — liquidity the business first has to find.

Do I need a company valuation for the relief?

Yes. The tax is assessed on the value of the assets transferred, and if the owner does not produce a figure the tax office will determine one itself using the simplified capitalised earnings method — often arriving at values that surprise owners. An independent, defensible valuation before the transfer is the basis of any structuring. The legal and tax implementation belongs with your tax adviser and notary.

What is the difference between Regelverschonung and Optionsverschonung?

The standard relief exempts 85 per cent of the qualifying assets and runs a five-year holding period with a 400 per cent payroll requirement. The full relief exempts 100 per cent but requires seven years, a 700 per cent payroll figure and stricter limits on administrative assets. The choice is binding and cannot be reversed later.

What are administrative assets, and why do they matter?

Administrative assets under § 13b ErbStG are the non-productive items on the balance sheet: land let to third parties, securities, works of art and cash above an allowance. They are taxed as if transferred privately, and if they reach 90 per cent or more of the total, the relief is lost altogether.

What happens if the successor sells within the holding period?

The relief falls away retrospectively and pro rata. Giving up the business has the same effect, as can withdrawals well in excess of profits. Anyone anticipating a sale within five to seven years should weigh an orderly sale against a gift before the transfer, not after it.

Is there an equivalent to this relief in Austria?

No. Austria abolished inheritance and gift tax, so this particular question does not arise there. Austrian handovers turn instead on real estate transfer tax where property is involved, on the trade licence, and on how the transfer agreement is structured.