Münster Fiscal Court: Tax exemption for gifted or bequeathed commercial buildings under construction

Background

When planning corporate succession, the distinction between “productive” corporate assets and “passive” administrative assets is of central importance. Passive assets generally do not benefit from the exemption of business assets from inheritance and gift tax (Section 13a onwards of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz – “Inheritance Tax Act”). If the value of the passive assets accounts for a large proportion of the total company value, the exemption for business assets may even be completely eliminated. The acquisition is then taxable in its entirety and subject to inheritance or gift tax of up to 50%.

Passive assets include properties leased to third parties for use. According to the German Federal Tax Court’s case law, the term “third party” is to be interpreted broadly, which is why the transfer of property between affiliated companies can also be detrimental. It was previously unclear whether a property is already “provided for use” if, at the time of the giving of a gift (or inheritance), it is not yet let but it is intended to be so in the future. Münster Fiscal Court (Finanzgericht Münster) had to consider this issue.

Judgments of Münster Fiscal Court of 14 November 2024 – 3 K 906/23 F and 3 K 908/23 F

In two parallel judgments on 14 November 2024 (cases 3 K 906/23 F and 3 K 908/23 F), Münster Fiscal Court ruled that, properties that have not yet been let and are still under construction at the time of gifting do not constitute passive assets within the meaning of Section 13b(4) no. 1 of the Inheritance Tax Act.

The judgments of Münster Fiscal Court are persuasively based on the systematics of the law and the clear wording of Section 13b(4) no. 1 of the Inheritance Tax Act, which only refers to the time of giving the gift in order to classify a property as an administrative asset. It follows that only the actual transfer of use to third parties on the qualifying date is relevant, but not a planned future use. In the opinion of Münster Fiscal Court, there was also no inappropriate arrangement within the meaning of Section 42 of the German Fiscal Tax Code (Abgabenordnung) because (i) the choice of the timing of a gift was at the discretion of the giver and the recipient and (ii) vacancy during the construction phase was a necessary intermediate stage before the completion and use of the property.

Practical implications

The ruling is highly significant in practice. By choosing the timing of a gift, the classification of a property as a “productive” business asset or “passive” administrative asset can be influenced and, if necessary, a tax benefit can be obtained (for example, when donating shares in property companies that hold properties under construction). This is particularly welcome news in view of the recent legislative measures to make corporate succession involving property leased throughout the group more difficult (see our blog post on 28 March 2024). It is advisable to carefully document the reasons for the property being vacant. The tax authorities have lodged an appeal against the rulings of Münster Fiscal Court (cases II R 37/24 and II R 38/24), so it is important to keep an eye on further developments.