Needs-Based Exemption Review: When the Legislator Puts the Brakes on the Market — and Why the “Family Ownership” Argument Is Surprisingly Flimsy
The so-called “needs-based exemption review” (correctly: § 28a German Inheritance Tax Act – ErbStG) is a special instrument designed for very large business transfers. For typical real estate investors, it is usually not relevant in practice – yet as an idea it is highly revealing: It shows how understanding the legislator becomes when ownership succession in large family businesses is at stake.
Note: This article provides an economic-policy perspective. Terms such as “privileged assets” and details of practical application are heavily simplified. Always seek professional tax advice for specific structuring.
Must a Company Remain in Family Ownership?
At first glance, it sounds appealing: “The life’s work should remain in the family.” But once this phrase is taken out of Sunday speeches and placed into economic reality, it becomes surprisingly vague. “Family” is not a quality indicator. From a tax perspective, family is simply a degree of kinship.
In 2014, the Federal Constitutional Court did not say: “Family businesses must remain in family ownership.” It said: If the state grants tax privileges, it must do so in a proportionate and equal-treatment manner.
The crucial question therefore is not: “Are tax privileges nice?” But rather: Why should the ownership structure “family” deserve more protection than a market-based solution?
- Why family? Is shared DNA a business advantage?
- Why not the market? Sale, investor, MBO, debt financing – all standard mechanisms.
- Why this sympathy? For very large fortunes, the state suddenly becomes a liquidity coach.
Political Justification: Jobs, Liquidity, Location
The classic justification goes as follows: inheritance tax could withdraw liquidity and thereby endanger the business. Therefore, business assets must be “protected” to safeguard jobs and economic locations.
Following the 2016 reform debate, this resulted in a system where very large transfers above a threshold are subject to special rules – including options and review mechanisms. A political overview can be found here: “Bundestag adopts inheritance tax reform” (Archive).
And here the inconsistency begins: If the argument “liquidity drain endangers companies” is truly convincing, it is not relevant only for very large enterprises.
Alternative: Market Mechanisms Are Normal, Not Scandalous
Let us assume “the market takes its course” – what would that mean in practice? Several perfectly standard corporate finance options exist:
- Partial sale (e.g. minority stake) to an investor
- Management buy-out or succession by qualified executives
- Debt financing if cash flows are sustainable
- Sale of non-core assets
- Restructuring if the business model is fragile anyway
In all these cases, the question “Can I afford this?” is normally a business one – not one answered by tax relief.
| Problem | Market logic | Protection logic |
|---|---|---|
| Tax payment creates liquidity need | Financing/investor/sale | Exemption/relief/phase-out model |
| Successor possibly unsuitable | Professionalisation/external management | Family succession effectively privileged |
| Capital tied up in business | Optimize capital structure | Tax law assumes “protective function” |
This is not an argument against family businesses. It is an argument for intellectual honesty: If the state treats ownership change as a “risk,” it departs from a market-based mindset.
The Inconsistency Question: If “Protection” Is Right – Why Not for All?
It becomes particularly interesting here: For very large beneficiaries above a threshold, the legislator introduced mechanisms not typically seen for smaller successions. The needs-based exemption review applies (simplified) where privileged assets exceed a certain threshold and the heir demonstrates that tax cannot be paid from “available assets.” See: Statutory text § 28a ErbStG (NWB) .
- Small/medium business: “Plan, finance, optimise – or sell.”
- Very large business: “Apply, demonstrate need, receive relief.”
If the argument “inheritance tax must not force a sale” is valid – then it should apply especially to small companies with limited financing capacity. Why, then, is state empathy strongest where wealth and advisory resources are already at their maximum?
Transfer to Real Estate Assets: Why No Comparable Protection?
For real estate investors, the debate is instructive because it reveals the underlying valuation: The state does not primarily distinguish by economic usefulness, but by whether assets qualify as privileged business assets.
- A rental portfolio may generate cash flow – but also involve leverage and capital lock-up.
- It supports service providers, craftsmen, and regional value creation.
- Yet there is no cultural reflex: “This must remain in the family.”
This shows: “Family ownership” is not a neutral criterion. It is a political narrative. And understanding that narrative helps investors better assess long-term tax risks.
Needs-Based Exemption Review: A Political Value Choice, Not a Logical Necessity
The needs-based exemption review is more than a technical tax rule. It reveals something about the legislator’s economic philosophy:
For large corporate fortunes, ownership change is treated as a problem to be prevented.
- Family membership says nothing about competence or entrepreneurial quality.
- The market offers legitimate succession solutions.
- If protection is truly about jobs, logic would require similar intensity for smaller firms.
Is the state really protecting companies – or primarily protecting certain owners from the possibility that the market might allocate assets more efficiently?
Not everyone needs § 28a ErbStG. But every investor benefits from understanding the value judgment behind it.
