Company split tax implications in inheritance and gift cases

A company split, where a business is divided into an owning entity (Besitzunternehmen) and an operating entity (Betriebsunternehmen), can have complex tax implications, particularly concerning inheritance and gift taxes. This structure has traditionally been used to separate the ongoing business operations from assets like the business premises.

In a classic company split, the owning entity leases essential business assets, such as real estate, to the operating company. Furthermore, one or more individuals control both entities, allowing them to enforce a uniform business intention. For tax purposes, these entities are then treated as a single unit.

From an inheritance and gift tax perspective, the company split can offer advantages. In Germany, for instance, specific conditions can grant an 85% or even 100% exemption from inheritance and gift tax for business assets. Real estate, which might otherwise be classified as passive investment property, can qualify for these tax benefits through a company split when transferred to the next generation.

Challenges often arise when the retiring generation wishes to withdraw from daily operations but retain the property as a retirement asset. This can lead to the property being automatically removed from the "tax unit" of the company split, thereby realizing latent tax reserves. The resulting tax burden may, in some cases, exceed future earnings. Additionally, if the entire business is not transferred to the next generation, potential tax benefits may be forfeited. Careful examination and potential restructuring before a generational handover are crucial to mitigate tax risks.