Inheritance taxes and family firms in Germany

• In Event: Wealth and Estate Taxation

Abstract

In this paper, we analyze the impact of tying inheritance tax relief to job preservation clauses for firms in Germany. Since 2009, business transfers were eligible for 85–100% tax exemptions if firms retained ownership and maintained wage sums for up to seven years. A 2016 reform lowered the threshold for unconditional exemptions from 20 to 5 employees. Using Difference-in-Differences methods, we show that the wage-bill requirement reduces employment by 4.2% in treated firms, mainly driven by a freeze in new hiring and postponed growth. This adjustment begins one to two years before the transfer, consistent with evidence on succession planning schedules. The effect is concentrated in small, manufacturing, and older firms, due to their limited ability to adjust labor costs and higher capital intensity. Our findings imply that the new threshold may be too strict for certain types of firms.

Author

• Gedeão Locks, glocks@diw.de