Usufruct

What is a usufruct?

Usufruct (German: Nießbrauch) is the right to draw the benefits of another person's asset or right without being the owner or holder (Sections 1030 and 1068 of the German Civil Code, Bürgerliches Gesetzbuch, BGB). The terms usufructuary right and right of usufruct are equivalent. The right is in rem, that is, it is effective against everyone. Benefits are income such as rents or profit distributions and the advantages of personal use, for example living in a house. For shares in a company, this means: the usufructuary receives the distributed profits, while the share itself belongs to another person. A usufruct cannot be transferred and ends at the latest with the death of the beneficiary (Sections 1059 and 1061 BGB).

In business succession, the reserved usufruct (Vorbehaltsnießbrauch) is the main case: an entrepreneur gifts shares to children and reserves all or part of the income for themselves. This allows the transfer of ownership and the provision for the transferor to be separated. The usufruct is regulated in the gift and assignment agreement; the articles of association and shareholders' agreement are affected, because they also determine consent requirements and voting rights.

Usufruct over GmbH shares: creation and forms

The creation of a usufruct over a right follows the formal requirements for its transfer (Section 1069 (1) BGB). For shares in a GmbH (German limited liability company), notarial recording is therefore required, as for an assignment under Section 15 (3) of the German Limited Liability Companies Act (GmbHG). In practice, gift, assignment and reservation of the usufruct are combined in one deed. If the articles of association require the consent of the company or of the shareholders for assignments, consent must as a rule also be obtained for the creation of a usufruct.

By scope, the following are distinguished:

• Full usufruct: The usufructuary is entitled to all profit shares from the share.
• Quota usufruct: The usufructuary receives a fixed share of the profits, for example 60%; the rest goes to the shareholder.
• Fractional usufruct: The usufruct burdens only part of the share.

In addition, it must be regulated whether the usufruct applies for life or for a fixed term and what happens on a sale of the share.

Profit entitlement and voting rights

The profit entitlement is the core of the usufruct. It covers the distributed profits but not the value of the share itself, that is, neither disposal proceeds nor the substance of the company. Whether profits are distributed, however, is decided by the shareholders. If a shareholders' meeting permanently retains profits in the company (retention), the usufruct runs empty economically. Usufruct agreements therefore often contain provisions on distribution policy.

Who holds the voting right is not expressly regulated by law. According to the prevailing view, it remains with the shareholder, at least for fundamental resolutions such as amendments to the articles of association. The parties can give the usufructuary influence through powers of attorney or voting agreements. The more influence remains with the transferor, the less the successor can decide. This also has tax consequences.

Usufruct over real estate

A usufruct over real estate is particularly common, for example when parents transfer a house to their children and want to continue living in it or letting it themselves. The transfer agreement must be notarially recorded; the usufruct arises through agreement and entry in the land register. The usufructuary may use or let the property and keeps the rents. The usufructuary bears the ordinary maintenance costs, the current public charges such as property tax and the interest on mortgages and land charges that already existed at the time of creation (Sections 1041 and 1047 BGB). Major renewals are not among the usufructuary's duties; contracts often provide otherwise.

Calculating a usufruct: capital value and gift tax

For gift tax, the capital value of the reserved usufruct reduces the value of the gift. The capital value is the present value of all benefits expected in future. Under the German Valuation Act (Bewertungsgesetz, BewG), it results from the annual value of the benefits and a multiplier that depends on the beneficiary's life expectancy (Section 14 (1) BewG). The Federal Ministry of Finance publishes the multipliers every year as a table by age and sex; online calculators also work with them.

Formula: capital value of the usufruct = annual value × multiplier; the annual value is at most the tax value of the asset divided by 18.6 (Section 16 BewG)

For shares, the annual value is the expected distributions; for an owner-occupied flat, it is the customary local rental value. If the usufruct ends through the beneficiary's death only a few years after the gift, the tax is adjusted on application according to the actual duration. How short the duration must be for this depends on the age at the time of the gift (Section 14 (2) BewG). To whom the distributions are attributable for income tax purposes depends on the type and structure of the usufruct. A later waiver of the usufruct is regularly itself a gift.

Particular care is required for the relief for business assets, the business relief (Verschonungsabschlag), which can exempt 85% or 100% of the qualifying assets from tax. For interests in partnerships, it requires that the donee becomes a co-entrepreneur (Mitunternehmer). The donee must be able to exercise co-entrepreneur initiative, that is, have voting and control rights, and bear co-entrepreneur risk, that is, participate in profit, loss and hidden reserves (increases in value not shown in the balance sheet). A usufruct that goes too far can prevent this. For GmbH shares, what matters is that the share actually passes and that the donor holds more than 25% (Section 13b of the German Inheritance and Gift Tax Act, Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG). Alternatively, a pooling agreement suffices, in which several shareholders undertake to vote and dispose uniformly. If the relief applies, the usufruct burden is deductible only proportionally.

Usufruct in a funding round and a company sale

A usufruct is an encumbrance on the share and is recorded in due diligence. Acquirers demand unencumbered shares; the usufruct is therefore usually cancelled on completion. How the purchase price is then divided between shareholder and usufructuary should be regulated in advance in the usufruct agreement. In funding rounds, it must be clarified who votes and whether obligations to sell along, such as drag-along provisions, also bind the usufructuary.

Worked example: gift of GmbH shares with a reserved usufruct

A 65-year-old entrepreneur holds 20% of a family GmbH; there is no pooling agreement. The entrepreneur gifts the share, with a tax value of EUR 3 million, to a daughter and reserves a quota usufruct over 60% of the distributions. The distributions on the share are expected to average EUR 150,000 a year. The multiplier is assumed to be 11.0 for the example; in practice, the table value on the day of the gift applies.

• Annual value of the usufruct: 60% of EUR 150,000 = EUR 90,000
• Check of the ceiling under Section 16 BewG: The distributions correspond to 5% of the tax value and stay below the limit of 1/18.6, that is about 5.4%; the annual value is not reduced
• Capital value: 90,000 × 11.0 = EUR 990,000
• Enrichment: 3,000,000 minus 990,000 = EUR 2,010,000
• Taxable acquisition after the allowance for children of EUR 400,000 (as at 2026): EUR 1,610,000
• Gift tax at 19% in tax class I: EUR 305,900
• Without the usufruct: (3,000,000 minus 400,000) × 19% = EUR 494,000
• Tax saving through the usufruct: 494,000 minus 305,900 = EUR 188,100

Relief is ruled out here because the holding is not above 25%. The daughter receives the share and the voting right immediately, 40% of the distributions on an ongoing basis and the full income after the usufruct ends. The lower tax reflects that she economically receives less at first.

Distinction: usufruct, right of residence and retirement provision payments

• Right of residence (Wohnungsrecht): entitles only to live in a building or part of it oneself (Section 1093 BGB). The beneficiary may let it only if the owner permits; the usufructuary, by contrast, may let and keep the rents.
• Retirement provision payments (Versorgungsleistungen): recurring payments by the successor to the transferor. They do not depend on distributions and are deductible as special expenses under narrow conditions.
• Granted usufruct (Zuwendungsnießbrauch): The holder keeps the share and grants the income to a third party. With the reserved usufruct, it is the other way round.
• Pooling agreement: bundles the voting rights and dispositions of several shareholders, often to reach the minimum holding for the relief.

Common mistakes

• Voting rights unresolved. Without an express provision, dispute and uncertainty arise over who votes in the shareholders' meeting.
• Distributions not regulated. If profits are retained, the usufructuary receives nothing, and the provision falls away.
• Relief jeopardised. If the transferor retains too much influence, the business assets relief can be lost.
• Sale scenario left open. Without a provision on dividing the proceeds, the usufruct blocks a later sale or forces an expensive settlement.
• Formal defects. Without notarial recording and the necessary consents, the creation is invalid.
• Compulsory portion consequences overlooked. If the donor largely reserves the income, case law holds that the ten-year period after which a gift no longer counts for compulsory portion claims (Pflichtteil) of other relatives can be postponed.

Frequently asked questions

Who votes on a GmbH share encumbered with a usufruct?

In principle the shareholder. Different arrangements through powers of attorney or voting agreements are possible but have tax and practical consequences.

Can the usufruct be cancelled later?

Yes, by waiver by the usufructuary. A waiver without consideration, however, is regularly itself a gift to the shareholder.

What happens to the usufruct on a sale of the shares?

It is usually cancelled on completion, because acquirers demand unencumbered shares. The division of the proceeds depends on the agreement of the parties.

Does a usufruct always reduce gift tax?

Not in full. If the relief for business assets applies, the usufruct burden is deductible only proportionally.

Does the ten-year period run for a gift under a usufruct?

For gift tax, yes. The ten-year period of Section 14 ErbStG begins with the execution of the gift, even if the donor reserves the usufruct. For compulsory portion claims, a separate period applies, the start of which a comprehensive usufruct can postpone.

What disadvantages does a usufruct have for the children?

They become owners but, with a full usufruct, can neither use the asset themselves nor draw its income until it ends. Sale and use as collateral are legally possible but difficult in practice, because the usufruct remains and buyers and banks value encumbered ownership lower. Gift tax is still due at the time of the gift, albeit on a lower value.

For the transferor, the disadvantage is that ownership is given up. Without a contractual right of reclaim, it can be demanded back only within narrow statutory limits.

The Roemer Capital view

Roemer Capital records usufruct rights over company shares at the start of a sale process, because they affect cancellation, division of proceeds and consents. Acquirers see such encumbrances in due diligence anyway; they should be resolved beforehand.

In family succession, Roemer Capital examines economically whether the company can sustain the planned distributions in the long term and whether the successor retains enough room for decisions. The tax structuring and the deed are a matter for the tax adviser, the law firm and the notary.