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PKF Newsletter 01 I 2018 - Anticipated inheritance - Caution is required with respect to usufructuary arrangements

The transfer of business assets while reserving the usufruct is one of the structuring instruments that can be used for anticipated inheritance. In this respect, the Federal Fiscal Court (Bundesfinanzhof, BFH) recently surprisingly ruled that transfers of business assets for no consideration could only be tax neutral if the commercial activity of the business owner will be terminated. This has shattered the previous practice of business transfers. This is because if usufruct is reserved for the transferor then the structuring of this will determine whether or not a tax-neutral transfer of the business at its carrying value is indeed possible. In the event of a usufruct agreement that is ‘harmful’ (detrimental from a tax point of view), in the future, there would be a risk that hidden reserves would be realised.