By Matthias Sobolewski
BERLIN (Reuters) - German governing parties have agreed to tighten up tax breaks for people who inherit firms in a reform to a law that also aims to protect jobs, officials said on Thursday, ending a bitter dispute that has lasted nearly two years.
The parliamentary mediation committee, representing the lower and upper houses, agreed that heirs should in future still be able to get a 100-percent tax break if they keep the firm going and preserve jobs. But the conditions will be stricter.
The reform to "Mittelstand" firms - medium-sized, often family owned businesses that form the backbone of Europe's largest economy - was needed after the Constitutional Court ruled the system breached the principle of equal tax treatment.
In December 2014, it demanded tighter restrictions for firms to qualify for tax breaks.
A 2009 law allows ownership of firms to be passed from one generation to the next tax-free as long as heirs keep them going for seven years and maintain employment levels.
A dispute between Chancellor Angela Merkel's conservative allies in Bavaria, who had pushed for preferential treatment for heirs, and the Social Democrats (SPD) and Greens had delayed an agreement which missed the mid-2016 deadline set by the court.
The deal is likely to be passed by the Bundestag lower house, probably on Sept. 29 according to party sources. It had originally been expected to go to a vote on Thursday.
It may, however, encounter more problems in the Bundesrat upper house if the Greens, many of whom oppose the reform, vote against it in mid-October.
The 16 members of the committee agreed on details including a formula to value firms to calculate their tax liability.
Exemptions for businesses worth more than 90 million euros will be abolished while preferential treatment for those worth more than 26 million euros will be reduced. In some cases, heirs will be allowed to pay taxes with private assets.
In addition, it will not be possible to use tax breaks on private wealth, such as art collections.
Germany's DIHK Chambers of Commerce hailed the deal, saying it would give family firms security as they made investment and hiring decisions.
The Foundation for Family Companies welcomed the certainty but expressed reservations.
"The tax burden for many big family firms may rise significantly and the new rules will require a lot more intensive planning and consultation," said foundation chief Rainer Kirchdoerfer.
The head of the Ifo economic think tank, Clemens Fuest, condemned the deal, describing it as an "employment program for tax consultants."
Fuest told the Passauer Neuen Presse newspaper that he fully expected the plan to be challenged in the Constitutional Court, and that a flat-rate with no exceptions would be the only fair solution.
Around 90 percent of German companies are family run and they employ around half of the country's working population.
In 2015, revenues from inheritance tax hit a record high of 6.3 billion euros, up 15.4 percent from the previous year, data from the Federal Statistics Office showed.
($1 = 0.8966 euro)
(Writing by Michelle Martin and Madeline Chambers; Editing by Andrew Heavens and Toby Chopra)