Inheritance Tax and Protection of Legitimate Expectations: Federal Fiscal Court Allows Retroactive Tightening

The German Federal Fiscal Court (BFH) has ruled that, in the context of inheritance tax, the legislature may retroactively tighten rules governing business assets. For taxpayers, this means increased risk, as protection of legitimate expectations (“Vertrauensschutz”) ends earlier than many assume—namely, at least upon the legislative resolution in the Bundestag.

Inheritance Tax and Protection of Legitimate Expectations: Key Points at a Glance

• The latest BFH ruling confirms that retroactive tax increases are permissible—even for transactions that have already been completed.
• Protection of legitimate expectations ends, at the latest, with the Bundestag’s legislative resolution, not only when the law is formally enacted.
• Anyone planning the transfer of business assets should monitor potential legislative changes at a very early stage.

What Is the Current BFH Ruling About?

The BFH judgment II R 7/23 of November 20, 2025, concerning the 2016 inheritance tax reform, is a landmark decision for advisory practice. It confirms the constitutional permissibility of a genuine retroactive tightening of preferential treatment for business assets and clearly shifts the risk during transitional periods toward taxpayers.

This means that those planning transfers of business assets will in the future be far less able to rely on protection of legitimate expectations. The decisive point is no longer the date a law is promulgated, but at the latest the moment when the political course is set in the Bundestag.

Overview of the BFH Decision

The BFH upheld the retroactive application of Section 13b (10) of the Inheritance Tax Act (ErbStG) as of July 1, 2016, as constitutional and dismissed the claimant’s appeal.

Facts of the Case: Gift of Business Assets

The dispute concerned a gift of business assets carried out before the new regulation entered into force, but after July 1, 2016. As part of the 2016 inheritance tax reform, the legislature introduced Section 13b (10) ErbStG retroactively as of July 1, 2016, to redefine the preferential treatment of business assets. This reform was prompted by the Federal Constitutional Court having declared the previous rules unconstitutional.

Why Did the Taxpayer File a Lawsuit?

The claimant challenged the application of the stricter new rules to an acquisition that had already taken place, arguing that this constituted impermissible genuine retroactivity and violated protection of legitimate expectations.

Key Legal Question on Protection of Legitimate Expectations

The central issue was whether the retroactive effect of Section 13b (10) ErbStG as of July 1, 2016, constituted impermissible genuine retroactivity, or whether, in this specific case, an exception allowing retroactive burdens applied.

Another issue was determining the point in time up to which taxpayers could legitimately rely on the continued applicability of the previous legal framework (considering the legislative process, Bundestag resolution, Bundesrat, and mediation committee).

Reasoning of the BFH: Retroactivity and Protection of Legitimate Expectations

The BFH classified the provision as a law with genuine retroactive effect but relied on the exceptions developed by the Federal Constitutional Court under which such retroactivity may be permissible.

According to the Constitutional Court’s case law, protection of legitimate expectations ceases as early as the Bundestag’s legislative resolution on a specific provision, provided the law is not based on a proposal from the mediation committee.

Role of the Legislative Process

In this case, the retroactive application had already been included in the Finance Committee’s recommendation of June 22, 2016, and was adopted by the Bundestag on June 24, 2016. From that point on, taxpayers could no longer rely on the continued validity of the previous preferential regime.

The fact that the Bundesrat later referred the matter to the mediation committee for substantial revision, and that an agreement was only reached there on September 22, 2016, does not change the BFH’s view that the Bundestag resolution had already eliminated any protected expectation in the old law.

Practical Consequences for Protection of Legitimate Expectations in Inheritance Tax

• Acquisitions of privileged business assets carried out between July 1, 2016, and the entry into force of the reform may fall under the retroactive application of Section 13b (10) ErbStG without violating the prohibition of retroactivity.
• For advisory practice, this means that, from the time of the relevant Bundestag resolution onward, taxpayers generally can no longer successfully invoke protection of legitimate expectations in the previous inheritance tax preferential rules if retroactivity was already embedded in the adopted legislation.
• The ruling strengthens the legislature’s ability to retroactively amend preferential rules for business assets in a burdensome manner and clearly shifts the allocation of risk during transitional periods to the detriment of taxpayers.

Significance for Future Reforms

The BFH accepts that genuine retroactivity in inheritance tax law may be permissible if legislative change must be seriously anticipated. This may also apply to the preferential treatment of business assets under Sections 13a and 13b ErbStG.

Future reforms (e.g., further restrictions on relief for large business assets, adjustments to administrative asset quotas, or stricter payroll or holding period requirements) may therefore increasingly rely on retroactive provisions without immediately posing significant constitutional risks.

Practical Recommendations

For clients planning transfers of business assets (family businesses, large shareholdings, holding partnership structures), it is advisable to closely monitor case law and legislative developments and, where appropriate, to implement planned structures before critical parliamentary resolutions or court decisions.

Notably, the BFH ruling leaves open whether protection of legitimate expectations in the continued applicability of a rule might already be eliminated at an even earlier stage (e.g., upon publication of a Federal Constitutional Court judgment), if the legislature subsequently enacts broader retroactive measures.

This creates the risk that the time window for utilizing tax benefits—particularly inheritance tax relief for business assets under Sections 13a and 13b ErbStG—may close much sooner than expected.

Important for Succession Planning

Timing can be crucial when transferring assets.

Have your planned transfer reviewed from a tax perspective at an early stage—we will support you in designing the optimal structure.

Antworten auf häufig gestellte Fragen zum BFH-Urteil:

Wann endet der Vertrauensschutz nach dem BFH?

Jedenfalls bereits mit dem Bundestagsbeschluss über die Neuregelung – nicht erst mit Inkrafttreten des Gesetzes.

Ist eine echte Rückwirkung im Steuerrecht zulässig?

Grundsätzlich nicht, aber dann ausnahmsweise möglich, wenn kein schutzwürdiges Vertrauen mehr besteht.

Welche Sachverhalte können hiervon aktuell besonders betroffen sein?

Übertragungen von Betriebsvermögen im Zeitraum zwischen rückwirkendem Stichtag und Inkrafttreten der Neuregelung. In diesem Bereich ist kurzfristig mit einer BVerfG-Entscheidung zu rechnen.

Was bedeutet das für die steuerliche Gestaltung?

Gesetzgebungsverfahren und Rechtsprechung sollten eng verfolgt und Übertragungen frühzeitig umgesetzt werden.

Answers to Frequently Asked Questions on the BFH Ruling:

When does protection of legitimate expectations end according to the BFH?

At the latest, it already ends with the Bundestag’s resolution on the new regulation—not only when the law enters into force.

Is genuine retroactivity permissible in tax law?

As a rule, no—but it may exceptionally be allowed if no legitimate expectation worthy of protection remains.

Which situations are currently particularly affected?

Transfers of business assets in the period between the retroactive cut-off date and the entry into force of the new regulation. A decision by the Federal Constitutional Court (BVerfG) is expected in this area in the near future.

What does this mean for tax planning?

Legislative developments and case law should be closely monitored, and transfers should be implemented at an early stage.