Passing on a direct investment: how German inheritance tax favours business assets

Succession planning usually revolves around real estate and securities portfolios. Few people know that an energy direct investment falls into its own, considerably more favourable category: it is not capital assets but a commercial business, and for business assets German inheritance tax law provides a far-reaching exemption. The idea behind it is old and sensible: whoever inherits a business should be able to carry it on rather than break it up to pay the tax. An investor's business benefits from the same logic.

Why is a direct investment favoured by inheritance tax?

Because it is business assets. Under §13b Abs. 1 Nr. 2 ErbStG, domestic business assets qualify for relief: an entire commercial business as well as an entrepreneurial stake in one. A direct investment meets that test in the normal case without any extra structuring; it generates commercial income, is run as a business on its own books, and is the same business that enabled the §7g lever in the first place (the basic mechanics are explained in The Investitionsabzugsbetrag explained simply: how the IAB works). The solar installation or storage facility itself is productive fixed assets and does not count as so-called administrative assets, which would be excluded from the relief; the catalogue in §13b Abs. 4 ErbStG essentially covers land let to third parties, securities and surplus financial means. For those who invested through their own GmbH, a parallel rule applies: shares in a corporation qualify from a stake of more than 25 % (§13b Abs. 1 Nr. 3 ErbStG); the differences between the two routes are covered in Invest through your GmbH or privately? The honest tax comparison.

At what value is the direct investment assessed?

What counts is the fair market value of the business on the transfer date, not the original purchase price. In practice it is often determined using the simplified capitalised-earnings method (§§199 ff. BewG): the sustainable annual profit is multiplied by the statutory factor of 13.75 (§203 Abs. 1 BewG); the net asset value serves as the floor. For planning purposes this means two things. First, the inheritance-tax value can deviate from the purchase price, upwards as well as downwards, depending on earnings and remaining term. Second, the value of an operating asset tends to decline over the years as the remaining earnings period shortens; the timing of a transfer is therefore also a valuation question. Only your tax advisor can put a reliable number on it, based on the actual figures.

How does the 85 % standard exemption work?

The standard relief exempts 85 % of the qualifying business assets from tax (§13a Abs. 1 ErbStG). For the remaining 15 % there is an additional deduction of up to €150,000 (§13a Abs. 2 ErbStG); it only starts to melt away once that remainder exceeds €150,000, at half of the excess. The consequence in numbers: a business worth up to €1 million passes on entirely tax-free through the standard relief and the deduction alone. The personal allowance (€500,000 for spouses, €400,000 per child, §16 ErbStG) remains untouched and stays fully available for the rest of the estate. That is exactly where the planning value lies: the direct investment does not compete with the house and the portfolio for the allowance; it brings its own exemption with it.

In the example the relief works twice over: the business itself passes tax-free, and because it drops out of the tax base, the rest of the estate also slides into a lower rate bracket. €133,000 of inheritance tax becomes €60,000; a saving of €73,000 without a single structuring step. Note, however, that the deduction is available only once every ten years per acquirer and donor; anyone planning several transfers should sequence them with their tax advisor.

When does the transfer stay 100 percent tax-free?

On application, a full 100 % exemption is available instead of the 85 % (§13a Abs. 10 ErbStG). The price is stricter conditions: the holding period extends from five to seven years, and administrative assets may make up no more than 20 % of the business value. For a running direct investment whose value sits essentially in the installation itself, that quota is often unproblematic; whether the application is worthwhile is still a case-by-case decision, because the election is binding. For business values up to €1 million, which are already fully exempt through the standard relief and the deduction, the option adds nothing and merely lengthens the commitment.

Which obligations does the heir or donee take on?

The exemption is not a gift from the tax office but a trade: tax relief in exchange for continuation. The successor must hold the business for five years (seven under the full exemption, §13a Abs. 6 ErbStG). If they sell or wind it up earlier, the relief lapses retroactively, though only proportionately: what matters is the ratio of the remaining to the total holding period. A sale after four of five years therefore costs only one fifth of the relief. There is also a withdrawal cap: anyone who, within the period, withdraws more than profits and contributions combined, by more than €150,000, loses the relief to that extent as well. Two points make life easier for investors. First, the payroll test that safeguards jobs at larger companies does not apply here: it is waived for businesses with no employees (§13a Abs. 3 ErbStG). Second, there is a reinvestment clause: if the proceeds of a sale are reinvested in qualifying business assets within six months, the clawback does not apply (§13a Abs. 6 sentences 3 and 4 ErbStG). How a sale during the term works in practice and which other deadlines it touches is described in Selling a direct investment early: how liquid an energy direct investment really is.

What happens to the IAB and special depreciation on inheritance?

This is the question that most concerns investors with a running §7g investment, and the answer is reassuring. On a transfer at death or by gift, the business continues at book values (§6 Abs. 3 EStG): no hidden reserves are realised, no income tax arises on the transfer, and the successor steps into the tax position of the predecessor. For the §7g periods this means, concretely: inheritance and gratuitous transfer are not a harmful use; the retention and usage period simply keeps running with the successor, as long as they continue the business (BMF circular of 15 June 2022, BStBl I 2022, 945, marginal no. 39). Even an IAB that has not yet been invested does not lapse: the successor can make the investment within the original window, which the transfer does not shorten (marginal no. 18). The Federal Fiscal Court has even ruled that an IAB may still be claimed when the gratuitous handover of the business is already settled and the successor will be the one to invest (judgment of 10 March 2016, IV R 14/12). The flip side belongs in the honest calculation: along with the book values, the successor also takes over the hidden reserves created by the IAB and the special depreciation. If they sell later, they pay tax on the gain the predecessor front-loaded; how that exit taxation works is shown in After the IAB: How the ongoing returns and the sale of a direct investment are taxed. And if they do not continue the business, the inheritance-tax clawback is joined by the reversal of the IAB and special depreciation; the deadlines are set out in Reversing the IAB: what happens if you don't invest, deadlines, interest, ways out.

Gifting during your lifetime or bequeathing: what is the difference?

For tax purposes, initially none: the business-asset exemption applies to gifts exactly as it does to inheritance, and the book-value continuation under §6 Abs. 3 EStG works in both directions. The difference lies in plannability. The personal allowances renew every ten years; those who start early can transfer larger estates in several stages. The transfer date can be chosen deliberately, for instance in a phase when the capitalised-earnings value of the installation is assessed low. And the transferor can train the successor: reading the reporting, sitting in on decisions, explaining the business, rather than all of that happening unprepared in the event of death. Anyone wanting to combine the handover with reservations such as usufruct or pension payments leaves the basic mechanics of this article; such structures have tax consequences of their own and belong firmly in individual advice. For entrepreneurs who are building a portfolio of investments over several years anyway, succession follows the same logic: Using the investment deduction every year: building a portfolio over multiple years shows the build-up, and the handover is its closing chapter.

Where the exemption reaches its limits

• Liquidity is not automatically favoured: bank balances and receivables count towards qualifying assets only up to a base of 15 % of the business value (§13b Abs. 4 Nr. 5 ErbStG). Financial means attributable to the business for less than two years count as young financial means and are always administrative assets. Moving cash into the business shortly before a transfer achieves nothing for inheritance tax.
• The holding period binds the successor, not the transferor: whoever inherits or receives the gift must be willing and able to continue the business for five or seven years. A succession in which the recipient wants to sell straight away forfeits the relief.
• The inheritance-tax value is not the purchase price: the capitalised-earnings method can come out higher or lower; reliable planning needs a concrete valuation by your tax advisor.
• Inheritance law does not follow automatically: for the business to end up with the intended successor rather than in a community of heirs, the will or transfer agreement needs to be drawn up properly; that is legal estate planning.

What does this mean for your succession planning?

A direct investment is tax-consistent across its entire life cycle: the §7g lever on entry, commercial taxation during operation, the exemption on handover. Anyone assessing an investment should therefore treat the succession question not as a topic for later but as part of the overall picture; the same care applies to entrepreneurs reinvesting the proceeds of a company sale with the next generation already in mind (Selling a practice or business: optimising the tax and reinvesting the proceeds sensibly). In our project reviews, whether a business is structured to be cleanly transferable is a standard question. What this means for your situation is something we are happy to discuss in a no-obligation initial consultation; the tax and legal implementation of your succession then belongs with your tax advisor and lawyer. We make no return promises in the process.