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.

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

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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.

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?

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Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.