Merryn's Blog

This one court decision could wreck Germany’s small business sector

The German constitutional court has made a ruling that could spell the end of the ‘Mittelstand’ system that makes up the backbone of the country’s economy.

If you inherit a small company in Germany you will do so entirely tax free as long as you keep it going and preserve the jobs of all the employees for at least seven years.

I wrote here a few months agothat I think this may be the key to the extraordinary success of the country's Mittelstand and do a degree it's whole economy: some 90% of Germany's companies are family run for the simple reason that families are heavily incentivised to hang on to and (crucially) to maintain the success of their companies.

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Tax changes behaviour in this case for the good. But there might be trouble ahead.

On Wednesday the German constitutional court ruled that these tax breaks for family run companies are illegal on the basis that they violate the principle of equal tax treatment.

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Keep an eye on what happens next: the chambers of commerce says that stopping the relief will triple the annual tax burden on small companies and trigger "hundreds of thousands of job losses."

Two thirds of firms facing generational change before 2019 also say that they would have to cut investment if the system changed. The change might also mean that small company owners no longer feel incentivised to persevere with their firms: instead as UK entrepreneurs are prone to they might just sell up and move on.

Could one court decision on tax spell the end of the Mittelstand system that makes up the backbone of the German economy?

PSIf you are in a giving mood or if you want to talk about any of the issues discussed here or just set the world to rights over lunch with me at one of London's top restaurants, today gives you one last chance to bid to do so in the Gavel & Grand International Rescue Committee auction. Here's the link.

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