Tax debate clouds Germany's boomer business transition

Andre von Bargen, 34, is preparing to take over Hamburg-based tech hardware firm Wiko Technik from his father Michael, one of many baby-boomer owners of Germany's mid-sized companies nearing retirement. But such handovers — part of a wave significant for Germany because of the economic weight of its "Mittelstand" enterprises — could become more difficult if tax rules on inheritance and inter-generational asset transfers are tightened.

"If that happens in our case, we'll have to see how we ⁠can continue running the company," von Bargen told Reuters of the first generational transfer of the 40-year-old firm specialising in membrane keyboards, touchpads and other input systems.

"If I no longer have room for investment, if I have to lay off employees so that I can pay the taxes — then what is my business purpose?" von Bargen said.

Mittelstand companies account for more than half of economic output and almost 60% of jobs in Germany, where the economy has stagnated since the pandemic. The economy ministry last week halved its growth forecast for 2026 while business morale fell in April to the lowest level since May 2020.

Just over half of Mittelstand owners, about 2 million including the smallest firms, are now aged over 55, according to KfW Research.

German tax rules largely shield transferred business assets because they are ⁠seen as "productive", tied to firms that employ people and support the wider economy. "Taking the step into entrepreneurship must become more attractive for young successors, not more complicated or more expensive," said Marc Tenbieg, managing director of the German Mittelstand association (DMB), arguing that a previous tax reform in 2016 created significant uncertainty.

But critics say giving business assets favourable treatment reinforces wealth inequality by unfairly shielding large fortunes while smaller ones are taxed more heavily. Germany's Constitutional Court is due to rule soon on whether the exemptions breach the principle of equal treatment. Under existing rules, business assets worth up to 26 million euros ($30 million) can be transferred largely tax-free, with relief tapering off between 26 million and 90 million euros.

A contentious waiver can eliminate the tax bill altogether for heirs of business assets exceeding 90 million euros who have no private assets, provided they keep the business for seven years, retain jobs and do not receive gifts.

"That is a distortion," Finance Minister Lars Klingbeil said in March when presenting proposals by his Social Democrats (SPD) to revive Germany's sluggish economy.

Instead, the centre-left party, junior partner in conservative chancellor Friedrich Merz's coalition, wants a flat 5 million-euro ($5.89 million) allowance with the potential to defer payment of any tax above that for up to 20 years. Merz's CDU says any changes should wait until the court rules. Among opposition parties, the Greens favour reform while the far-right AfD wants ⁠all inheritance and gift taxes scrapped.

Business groups counter that family-firm wealth is typically tied up in day-to-day operations rather than held in cash. A study by the Family Business Foundation said the SPD proposal would lead to higher tax bills for 83,000 family businesses employing 5.2 million people. Frauke Heiligenstadt, SPD spokesperson for financial policy, said the fears of Mittelstand companies are overblown, as the proposed threshold would affect only a tiny minority of firms.

"Anyone who buys a company has to finance the acquisition. That basic economic logic should not disappear just because the buyer is an heir," Heiligenstadt said.

Germany ranks around the middle of Europe on disposable-income inequality but at the top alongside Spain and Ireland for wealth inequality, according to EU research agency Eurofound. "Germany looks bad on wealth inequality, but that is also historically rooted," said DIW economist Markus Grabka, pointing to Germany's low homeownership rate, the legacy of postwar displacement and East-West disparities after reunification.

Christian Deuss, a tax adviser who has spent two decades helping Mittelstand firms navigate succession, said generous exemptions can in some cases lead to large fortunes being transferred tax-free, for example when a family foundation is established and business assets are transferred to it.

"This is the ⁠reason for the sense of inequality and injustice," said Deuss. "In practice, the tax burden is concentrated on medium-sized estates with little or no corporate assets and limited planning options."

Tobias Hentze of the economic institute IW agreed that Germany's large number of family-owned businesses helped broaden inequality.

But "low wealth inequality cannot be a goal in itself", Hentze said. "We need more millionaires. It would be a great thing if Germany managed to build a Google 2.0."

Tax experts said a flat-rate inheritance charge of around 10%, combined with ⁠the removal of exemptions, could make the system simpler and fairer, although such taxes are generally not an effective tool for reducing inequality.

The cost of reform to public finances would also be limited: Alexander Mengden of the Tax Foundation said inheritance taxes raise relatively little revenue while discouraging savings and investment. Germany's inheritance tax brought in 13 billion euros, or 0.23% of GDP, in 2024, despite a top rate of 50%, among the highest in Europe.

Wiko Technik's von Bargen said taxing inherited businesses was fair, provided the burden remained manageable. "It ⁠is a win-win if I continue the company, secure jobs and continue to generate tax revenue for the state."