This is the right of usufruct with reservation
In the case of a reserved usufruct, the donor gifts assets – such as shares in a family-owned company – to children or grandchildren, whilst reserving the right to receive the ongoing income for the rest of their life. This is doubly attractive: the income continues to flow to the donor, and the value of the usufruct reduces the amount on which the tax office levies inheritance or gift tax. This article focuses on the usufruct of shares in an asset-managing partnership – typically a family-owned limited partnership (KG) that holds securities, property or shareholdings.
The Federal Fiscal Court (BFH) has tightened the rules
For tax purposes, what matters is not who receives the income – but who actually makes the decisions within the asset-managing partnership:
- If, as a usufructuary, a person merely receives the profits but has no genuine say in the partnership’s affairs, these profits are not attributed to them for tax purposes. The mere right to the profits is not sufficient.
- In the case of usufruct of limited partnership interests, a simple right of veto is not enough. The usufructuary must have the right, as set out in the partnership agreement, to compel the partner to abstain from voting on fundamental resolutions – e.g. amendments to the articles of association or the dissolution of the partnership.
Other options – a brief overview: In the case of a commercial partnership (e.g. a family-run business), the usufructuary and the partners are generally expected to be co-owners of the business for tax purposes and to generate their own commercial income. Anyone seeking to benefit from the inheritance tax exemption for business assets (Sections 13a and 13b of the Inheritance Tax Act) faces an additional dilemma: the exemption requires the beneficiary to retain genuine entrepreneurial initiative – which is in direct conflict with the income tax requirement to grant the usufructuary comprehensive voting rights. In the case of usufruct of shares in a limited company (GmbH, AG), the situation is similar in substance – though on a different legal basis.
Action required: What needs to be reviewed in existing structures
Anyone who has previously gifted shares subject to a usufruct clause often finds themselves faced with the following problem today: the gift deed – and the usufruct rights agreed therein – can hardly be amended retrospectively. What can be adapted, however, is the articles of association. The crucial question is therefore: does the articles of association already grant the usufructuary the right to actively participate in voting on fundamental decisions – such as amendments to the articles of association, the admission of new shareholders or the dissolution of the company – and, if necessary, to compel the shareholder to abstain? If not, the articles of association should be amended accordingly.
A general point of importance: in the case of family agreements, the tax authorities always check not only whether the terms are in line with arm’s-length principles, but also whether the agreed provisions are actually being implemented in practice (substance over form).
What new arrangements must get right from the outset
Anyone wishing to gift company shares subject to a right of usufruct today has an advantage over older cases: the gift deed and the articles of association can be coordinated from the outset. Both documents work in tandem – and both must be consistent. The gift deed determines which rights the usufructuary retains. The articles of association must safeguard these rights at company level and specify precisely the extent of the usufructuary’s influence.
The difficulty lies in this: too much influence – and, for tax purposes, beneficial ownership remains with the donor; the transfer of assets does not take place.
Too little influence – and the income is attributed to the donee for tax purposes, meaning they must pay tax on it, even though the donor receives it in economic terms.
It is all about striking the right balance. Both contracts must be precisely tailored to one another – otherwise, unnecessary risks arise.
Conclusion
Usufruct with reservation of ownership is and remains a key instrument for business succession and inheritance tax planning. When structured correctly, it preserves the assets and secures the income for the donor. If set up incorrectly – or rendered obsolete by outdated contracts – there is a risk of significant tax disadvantages. The Federal Fiscal Court’s case law on this matter is not yet finalised; further rulings from ongoing proceedings are to be expected.
Our advice: Have your existing arrangements reviewed now, particularly your articles of association. For new arrangements, the following applies: the gift deed and the articles of association must be designed jointly and in coordination with one another – right from the start, from a single source.
Key points in brief
- In various judgements (particularly those from 2022–2024), the Federal Fiscal Court (BFH) has clarified that where a usufructuary merely receives income but has no genuine influence over the company, the tax authorities do not attribute this income to them for tax purposes.
- Once a gift has been made, the gift deed can no longer be amended – but the articles of association can. This is precisely where the lever lies for past cases.
- New usufruct arrangements require coordinated planning: the gift deed and the articles of association must be drawn up jointly and precisely tailored to one another from the outset.
