German family-owned firms face inheritance tax challenge

KARLSRUHE, Germany, Oct 13 (Reuters) - Germany's top court began hearing a challenge on Tuesday to generous tax exemptions on inherited business assets which the country's backbone of small- and medium-sized firms say could hurt investment and lead to job losses if it succeeds.

Mittelstand companies, which account for around 99% of German firms, say they already face challenges ranging from bureaucracy to high energy costs, as Europe's largest economy struggles to regain momentum after years of weak growth.

Associations representing the mostly family-owned businesses argued at the hearing that changes to a 2016 inheritance tax law, enacted after an earlier constitutional court ruling, would place additional strain on firms.

"The differences in the taxation of business assets and private assets are objectively justified," said Monika Wuennemann of Germany's BDI industry association. 

Inheritance tax must be paid out of profit distributions, which weakens investment capacity, added Wuennemann.

Depending on the heir's relationship to the deceased and the value of the inheritance, private assets can be taxed at up to 50%. By contrast, business assets can in some cases qualify for 100% exemption if the heirs continue operating the business for at least seven years and maintain the original payroll level.

At the centre of the case is a complaint by a man who says that he faced unequal treatment after being taxed at a higher rate for private assets that he inherited from his aunt than those that would have applied to qualifying business assets.

A finance ministry representative who was invited to attend the constitutional court hearing on Tuesday, along with 20 associations, institutes, academics and organisations, defended the 2016 law as in line with previous court guidance.

The court is expected to issue a ruling in coming months.

Germany's federal statistics office says the state forfeited €3.7 billion ($4.14 billion) in revenue last year after 34 heirs had a large portion of the inheritance tax on their assets waived. 

($1 = 0.8931 euros) 

($1 = 0.8937 euros)

(Reporting by Ursula Knapp and Miranda Murray; Editing by Alexander Smith)