Inheritance tax relief also applies to fictional usufruct

Gifts are often made subject to revocation clauses. If the revocation does not have retroactive effect in economic terms, Section 29 (2) of the German Inheritance Tax Act (ErbStG) stipulates that the acquirer is treated as a usufructuary for the period during which he was entitled to use the gifted assets (fictional usufruct). In its decision of March 19, 2025 (case no. II R 34/22), the German Federal Fiscal Court (BFH) has now clarified the effect of this provision: The granting of a sub-participation in a limited partnership (KG) by way of gift, through which the donee acquires the status of a co-partner, is also favored under Sections 13a and 13b ErbStG even if, after revocation of the gift, the recipient is to be treated as a usufructuary in accordance with Section 29 (2) ErbStG for the period during which he was entitled to use the gifted assets. Consequently, Section 29 (2) ErbStG merely imposes a restriction on the originally taxable gift to the remaining benefit of use. The original acquisition, on the other hand, continues to exist to a reduced extent.

In a dispute, a co-partner in several limited partnerships granted his daughter a sub-share in his holdings free of charge, making her a co-partner in each case. In the notarized gift agreements, the father reserved the right of revocation in the event that, after the conclusion of the agreement, one or more additional biological legitimate offspring were born to him or changes to the inheritance tax law or the valuation law were passed that would lead to a complete or partial direct or indirect reduction in the tax burden on the transfer of assets. The tax office granted the benefits under Section 13a ErbStG with regard to these transfers.

In 2009, in view of the inheritance tax reform law that came into force on January 1, 2009, the father declared to his daughter that he was revoking the gift of 95% of a single sub-participation. In 2011, he concluded an agreement with her on the retransfer of the sub-participation: The daughter was to transfer the corresponding portion of the participation back to her father as the main participant with economic effect on the agreed date in 2011; the profit shares, interest, and other benefits accrued up to the date of transfer with respect to the portion of the sub-participation affected by the revocation would remain with the sub-participant.

The tax office then refused to apply Section 13a of the German Inheritance Tax Act (ErbStG). It argued that the daughter's status as a co-partner had been retroactively revoked due to her father's revocation of the gift. The tax relief provided for in Section 13a ErbStG could therefore no longer be applied to the usufruct of the company shares. However, the tax court and the Federal Fiscal Court took a different view: the tax relief must also be granted for the benefits derived by the sub-participant until the revocation of the gift, which were used as the basis for taxation in accordance with Section 29 (2) ErbStG.

There is controversy as to how the taxation of the benefit of use under Section 29 (2) ErbStG should be classified in terms of tax systematics. The BFH follows the prevailing opinion in this regard. According to this opinion, Section 29 (2) ErbStG does not contain a provision for a new acquisition in the form of a fictional usufruct but only clarifies that a refund of the tax is not possible insofar as the acquirer has been granted the use of the transferred assets and thus remains enriched. The provision merely imposes a restriction on the originally taxable gift to the remaining benefit of use. In the cases covered by Section 29 (2) ErbStG, the original acquisition continues to exist to a reduced extent. The BFH rejects the contrary view of the tax authorities (R E 29 ErbStR 2019).

Consequently, the original acquisition is not replaced by a fictional usufruct under the law, but the expiring tax is merely reduced by the amount that the acquirer would have had to pay in taxes if, instead of the transferred object, he had only been granted a temporary right of usufruct. The taxation of the original (beneficial) object of the gift remains unchanged - in the case in dispute, the co-entrepreneurial sub-participation - which, in view of the subsequent surrender, is only assigned a lower value.

The tax court also rightly pointed out that the daughter remained a co-partner in the period between the transfer of the sub-participation by way of gift and its retransfer. This is because, contrary to the opinion of the tax office, her co-partner status did not lapse retroactively because of the revocation of the gifts by her father with effect from the agreed date in 2011.