The Federal Fiscal Court of Germany (BFH) has ruled that hotels, parking garages, and other lodging businesses are classified as harmful administrative assets under inheritance tax law. This decision has significant implications for entrepreneurs wishing to pass down such businesses to heirs while benefiting from inheritance tax privileges.
Inheritance Tax Relief for Business Assets
German inheritance tax law provides special relief for productive business assets to ensure that companies can be passed on without the financial burden of excessive tax liabilities. Under certain conditions, a relief of up to 85% or even 100% of the taxable value is possible.
However, assets primarily used to generate passive income, such as rented properties, are generally excluded from these tax benefits. This exclusion is meant to focus relief on assets that contribute to job creation and broader economic activity. Only a few exceptions exist, such as when the lessor names the lessee as heir through a will in cases of indefinite leasing agreements.
The BFH Case: Parking Garage and Gas Station
In the case reviewed by the BFH (ruling dated February 28, 2024, II R 27/21), the taxpayer was the sole heir of his father, who passed away in 2018. The inherited assets included a property with a parking garage and a gas station. Initially, the father operated the parking garage as a sole proprietor but began leasing it to his son in 2000. The gas station was leased to a third party.
The tax office classified both the parking garage and gas station as harmful administrative assets, making them ineligible for inheritance tax relief. The Fiscal Court of Cologne upheld this assessment in its ruling from June 10, 2021 (7 K 2718/20).
Harmful Administrative Assets
The BFH confirmed that both the parking garage and the gas station were harmful administrative assets. The parking garage was classified as administrative property since its spaces were rented to third parties before being leased to the son. The gas station did not qualify for the exemption because it was leased to a GmbH, which was not named as the heir.
While the indefinite lease of the parking garage to the son initially met the conditions for exemption, the BFH ruled that the exemption could not apply because the property had already been classified as harmful administrative property prior to the lease agreement. The father’s decision to rent out the parking spaces to third parties before leasing the property to his son disqualified it from tax relief.
Hotels and Lodging Businesses
The BFH extended its reasoning to hotels and other lodging businesses, such as guesthouses and campsites. According to the court, these businesses are also considered harmful administrative assets because they involve granting the use of property to third parties. This interpretation contrasts with the position of the tax administration, which argued that lodging businesses involved genuine commercial activities and thus should not be classified as administrative assets.
The BFH emphasized that the current wording of the law does not support the tax administration’s view. Despite the legislative intent to include lodging businesses in the inheritance tax relief, the court ruled that they must be classified as harmful administrative assets based on the legal text.
Implications and Outlook
The court’s decision highlights a discrepancy between the legislative intent behind the 2016 inheritance tax reform and the actual wording of the law. This ruling means that hotels and similar businesses currently cannot benefit from inheritance tax relief, even though the original goal was to include them.
It remains to be seen how the tax administration will respond to this decision. Potential solutions include a non-application decree or legislative amendments to explicitly include lodging businesses in the inheritance tax relief. Swift action from the tax administration and lawmakers would be beneficial to create legal certainty for lodging businesses.
If you have questions about inheritance tax and business asset classification, please contact us at WW+KN, a Baker Tilly Company, via info@wwkn.de.
