Business Relief

What is business relief?

Business relief (German: Verschonungsabschlag) denotes the tax exemption under Section 13a of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG), under which qualifying business assets remain wholly or largely tax-free on inheritance or gift. What qualifies is the assets with which a company actually does business, but not pure investment assets such as securities, land let to third parties or surplus cash holdings. Under standard relief, 85% of the qualifying assets remain tax-free; under optional relief, 100%.

In return, the acquirer must meet two conditions. The acquirer may not sell or give up the company during a holding period of five or seven years. And the total wages paid during that time must not fall below a minimum threshold (payroll rule, Lohnsummenregel), so that jobs are preserved.

For company transfers, the relief is the most important concession in inheritance and gift tax. It becomes relevant when shareholders give shares to children or other relatives or when a company is inherited, that is, above all in business succession. It is regulated in Sections 13a to 13c and 28a ErbStG; the value of the transferred assets is determined by the German Valuation Act (Bewertungsgesetz, BewG). The Federal Constitutional Court (Bundesverfassungsgericht) is examining (as of October 2026) whether the relief for business assets is compatible with the Basic Law (Grundgesetz). A second proceeding, brought at the request of the Bavarian state government, concerns the valuation of real estate, the allowances and the tax rates. Until the court has decided and the legislature has, where necessary, enacted new rules, the existing law applies.

Prerequisites: qualifying assets and administrative assets

Under Section 13b(1) ErbStG, three types of assets can qualify: agricultural and forestry assets, business assets of sole proprietorships and partnerships, and shares in corporations. In agriculture, the farming part of the holding qualifies, excluding individual plots let on long-term leases (Stückländereien). Shares in a GmbH (German limited liability company) count only if the donor or testator directly held more than 25% of the nominal capital. Anyone who does not reach this threshold alone can combine shares with those of other shareholders in a pooling agreement, which prescribes uniform disposal and exercise of voting rights. After several funding rounds, founders' holdings are often at 25% or below because of dilution.

Administrative assets (Verwaltungsvermögen) do not qualify (Section 13b(4) ErbStG). These include above all land made available to third parties for use, shareholdings in corporations of 25% or less, securities and works of art. Administrative assets also include financial assets such as bank balances and receivables, to the extent that after deduction of debts they exceed 15% of the value of the business assets. Always excluded are administrative assets attributable to the business for less than two years and financial assets that have been contributed on balance in the last two years (young financial assets, junge Finanzmittel). After netting against the proportionate debts, administrative assets of up to 10% of the remaining business assets are harmless. If, on the other hand, they amount to at least 90% of the qualifying assets, the relief lapses entirely.

After a funding round, the financial assets test deserves particular attention. The money from the capital increase initially sits in the bank account and, to the extent it was contributed in the last two years, counts as young financial assets. A high level of financial assets can also rule out optional relief, which allows at most 20% administrative assets.

Standard relief and optional relief

• Standard relief: 85% tax-free. A deduction amount of up to EUR 150,000 applies to the remaining 15%. It is reduced by half of the amount by which this remainder exceeds EUR 150,000 and therefore falls away entirely from EUR 450,000. For acquisitions from the same person, it is granted only once within ten years. Holding period five years, minimum payroll total 400% of the base payroll.
• Optional relief: 100% tax-free on irrevocable application. A prerequisite is that the qualifying assets consist of at most 20% administrative assets. Holding period seven years, minimum payroll total 700%.

Formula: remaining value = qualifying assets × (100% minus business relief percentage) minus deduction amount

The base payroll is the average of the payroll totals of the last five financial years ending before the acquisition. The sum of the annual payroll totals in the five or seven years after the acquisition must reach at least 400% or 700% of that figure respectively. Graduated values apply to smaller businesses. With no more than five employees, the payroll rule does not apply; with six to ten employees, the minimum payroll total is 250% (option 500%); with 11 to 15 employees, 300% (option 565%). If the minimum payroll total is not met, the relief is reduced proportionately, by the same percentage as the shortfall.

The choice is a trade-off between 15 percentage points of additional exemption and two additional years of commitment with a higher payroll total. Where business performance fluctuates or restructurings are planned, standard relief is often the safer choice.

Holding period and subsequent taxation

Harmful within the holding period are above all:

• the sale of shares in corporations and the dissolution of the company,
• the disposal of a business, part of a business or essential business assets,
• withdrawals or distributions that exceed the contributions and profits since the acquisition by more than EUR 150,000 (excess withdrawals),
• for pooled shares, the termination of the pooling agreement.

In the event of a breach, the relief lapses retroactively. On a sale, cessation or termination of the pool, this happens only pro rata over time, in proportion of the remaining period, including the year of the breach, to the whole period. For excess withdrawals there is no such pro rata reduction. If the acquirer reinvests the sale proceeds within six months in qualifying assets of the same kind, subsequent taxation does not apply. The acquirer must report breaches of the holding period to the tax office within one month, and a shortfall in the minimum payroll total within six months after the end of the payroll period (Section 13a(7) ErbStG).

For a company sale, the holding period is what matters most. If shares are given to children shortly before a possible sale and then sold along with the rest, the sale triggers subsequent taxation. The value at the time of the gift is taxed retroactively, not the later purchase price; the capital gain itself is additionally subject to income tax. In preparing a sale, an overview of earlier gifts and the status of their periods therefore belongs among the seller-side documents.

Acquisitions above EUR 26 million

Where qualifying assets exceed EUR 26 million, the relief is no longer granted automatically. All acquisitions of qualifying assets from the same person within ten years are added together (Section 13a(1) sentence 2 ErbStG). The acquirer can then choose between two routes:

• Phase-out model (Section 13c ErbStG): The relief percentage falls by one percentage point for each full EUR 750,000 by which the qualifying assets exceed EUR 26 million. From EUR 90 million, no relief is granted any more.
• Relief needs test (Section 28a ErbStG): The tax on the qualifying assets is waived to the extent that the acquirer cannot pay it from half of the acquirer's available assets. Available are the acquirer's own non-qualifying assets and those transferred along with the business.

For family businesses, an advance discount of up to 30% can additionally be considered (Section 13a(9) ErbStG). For this, the articles of association must restrict withdrawals, dispositions of shares and compensation payments in a particular way, specifically for two years before and 20 years after the acquisition.

Worked example: business relief on a gift of GmbH shares

An entrepreneur transfers her 60% stake in a GmbH to her daughter as a gift. The tax value of the shares is EUR 8.0 million. Administrative assets exist only to a harmless extent, so that the entire value qualifies, and the payroll rule is met. The daughter has a personal allowance of EUR 400,000 and falls into tax class I.

• Without relief: EUR 8,000,000 minus EUR 400,000 = EUR 7,600,000; tax rate under Section 19 ErbStG 23%; tax EUR 1,748,000
• Standard relief: 85% of EUR 8,000,000 = EUR 6,800,000 tax-free; remaining EUR 1,200,000
• Deduction amount: 50% of (EUR 1,200,000 minus EUR 150,000) = EUR 525,000 exceeds EUR 150,000, so the deduction amount falls away
• Taxable: EUR 1,200,000 minus EUR 400,000 = EUR 800,000; tax rate 19%; tax EUR 152,000
• Optional relief: 100% tax-free; tax EUR 0

In the fourth year after the gift, that is, after three full years of the holding period, the company is sold.

• Standard relief: 2/5 of the relief lapses, that is, EUR 2,720,000. The taxable amount becomes EUR 1,200,000 plus EUR 2,720,000 minus EUR 400,000 = EUR 3,520,000; tax 19% = EUR 668,800; additional payment EUR 516,800
• Optional relief: 4/7 of the relief lapses, that is, EUR 4,571,429. After deduction of the allowance, EUR 4,171,429 remain, rounded down to EUR 4,171,400; tax 19% = EUR 792,566, which is payable in full

If all conditions are met, optional relief saves EUR 152,000. On a sale in the fourth year, by contrast, it costs around EUR 123,800 more than standard relief, because the larger relief is withdrawn over the longer period.

Distinctions: business relief, allowance and tax rate limitation

• Personal allowance: applies to every acquisition regardless of the type of assets, EUR 400,000 for children. It is applied in addition to the business relief to the taxable remainder.
• Tax rate limitation (Section 19a ErbStG): Acquirers in tax classes II and III, such as siblings or non-family successors, pay tax on the taxable part of the qualifying assets only at the rates of tax class I. It supplements the business relief.
• Usufruct: With a gift subject to a reserved usufruct, the donor keeps the income. The relief remains possible; for partnerships, however, it requires that the recipient becomes a co-entrepreneur (Mitunternehmer).

Common mistakes

• Optional relief chosen without planning. The application is irrevocable. Without a robust payroll plan over seven years, the higher exemption can turn out more expensive than standard relief.
• Administrative assets not checked in time. Let property, securities and large bank balances can be reorganised only with lead time, not after the acquisition.
• Minimum shareholding overlooked. Shares in a GmbH of 25% or less do not qualify without a pooling agreement.
• Ten-year period forgotten. Acquisitions from the same person within ten years are aggregated. This applies to the allowances (Section 14 ErbStG) and to the EUR 26 million threshold (Section 13a(1) ErbStG).

Frequently asked questions

Does business relief also apply to shares in a GmbH?

Yes, if the donor or testator directly held more than 25% or combined the shares with those of other shareholders in a pooling agreement.

What happens if the company is sold within the holding period?

The relief lapses pro rata for the remaining period, including the year of the sale, and the tax is assessed retroactively.

What conditions apply to business relief?

Qualifying assets must be transferred, that is, a business, an interest in a partnership or more than 25% of a corporation. Administrative assets must be below 90%, and for optional relief at most 20%. After that, the payroll total and the holding period must be observed; special rules apply above EUR 26 million.

How is a growth company valued for gift tax?

At fair market value under Section 11(2) BewG, that is, the price that could be achieved on a sale. Where sales between unrelated third parties took place less than one year ago, the value is derived from them. Otherwise it is valued on the basis of earnings prospects or a recognised method of business valuation, but at least at net asset value. How funding rounds with preferential rights for investors are to be taken into account here has to be clarified in each individual case.

The Roemer Capital view

In succession mandates, it must be clarified early whether a company is transferred within the family or sold to third parties, and in what order. Business relief is a major item in the calculation here, because a gift followed by a sale within the holding period loses part of the relief again. We therefore lay timelines and scenarios for transfer and sale side by side and coordinate them with the client's tax adviser, who is responsible for the tax structuring.

In financial models that we build as fractional CFO, we map the payroll total over five or seven years, including a conservative case. The choice between standard and optional relief is then based on robust planning.