Avoidance of Multiple Inheritance Taxation within Europe
By
Prof. Dr. Alain Steichen
1. Comparative (domestic) tax law
1.1.
Overview
Luxembourg levies two types of taxes upon transmission of property on death : « le
droit de succession » and « le droit de mutation par décès ». The differentiation
criteria is the residence of the decedent at the date of his death.

“Droit de succession” is levied on the entire net estate inherited from a person
who was resident of Luxembourg at the time of his death

“Droit de mutation par décès” is levied upon death of a non-resident, only on the
real estate located in Luxembourg
The “droit de succession “ is a beneficiary-based tax. It is levied on the acquisitions
received by each individual heir and hence, qualifies as inheritance tax. On the
contrary, the “droit de mutation” may be characterized as an estate tax based on the
transfer of Luxembourg-situs immovable property.
Transmissions of property inter vivos are subject to gift tax (droits de donation). Gift
tax is not regulated by a specific law but is governed by the same legislation as the
registration tax. Registration is a formality whereby a written document, a deed or a
statement is recorded in a register held y the Administration de l’Enregistrement et
des Domaines. Registration is compulsory for some written documents either because
of the capacity of the person who drafted the deed (i.e. notarial deed) or because of
the transaction evidenced in the deed (i.e. transfer of the property of real estate, lease
contract, etc). Some transactions are also subject to registration even though not
evidenced in a written document (i.e. transfer of the property of a real estate).
Consequently, gifts are not systematically subject to registration tax (i.e. hand to hand
gifts) but only if the property transmission is stated in a written document and
registered either on a voluntary basis or on a compulsory basis.
The taxation of free transfer of property either on death or inter vivos is still based on
laws which go back to the French revolutionary or the Dutch period. The inheritance
tax is mainly based on the French law of 22 frimaire an II whereas the gift tax is based
on the law dated December 27th, 18171.
Since the law differentiate the taxation of transfer on death and inter vivos, we will
treat separately the related taxes in the sections below.
1
The relevant provisions of this law may be found in Code Fiscal de la Legislation Luxembourgeoise,
Volume 5, Titre 2 “Droits d’enregistrement” and Titre 3 “Droits de succession et de mutation par
décès”
1.2.
Tax liability
Inheritance and estate tax
Inheritance tax is levied on all assets inherited upon death of a resident of
Luxembourg, except immovable property located abroad. A resident of Luxembourg
(un habitant du Luxembourg) is a person who has established in Luxembourg his
domicile or his wealth seat (siège de sa fortune). These two criteria are not alternative
but cumulative. The residence of a person is determined on the basis of facts : it is the
place where the person has established his real, permanent, effective home. The
nationality or the civil domicile are not relevant. The wealth seat is the place from
where the assets were administrated or controlled. It is not the place where the wealth
of the deceased is located.
As regards estate tax, the determining factor is the location of the real estate. Estate
tax is levied on the value of the real estate located on the Luxembourg territory and
inherited on the death of a person who is not considered as resident of Luxembourg.
The residence of the heirs or the legatee is not relevant : no inheritance tax or estate
tax will be levied on the assets transferred to Luxembourg residents upon death of a
non-resident person (except for immovable property). The Luxembourg movable
assets held by a non-resident, such as accounts with Luxembourg banks, securities
issued by Luxembourg companies, insurance benefits from Luxembourg life
insurance, etc. will not be subject to Luxembourg tax either if they are transferred to
Luxembourg resident or to non-residents.
Gift tax
Gift tax is only levied on donations, which are submitted to the Administration de
l’Enregistrement et des Domaines for registration.
According to the civil law, a donation is only recognised if the contract is passed
before a notary. As all notarial deeds must be registered, donations are in general
subject to registration tax (gift tax). However, the civil law also recognises so called
manual or hand to hand gift. Such gifts are only possible for tangible movable assets.
Since a hand to hand donation is not evidenced in a written document, no gift tax will
be levied.
Consequently, are subject to gift tax :
 donations of real estate located in Luxembourg since it is a legal obligation to
register the transfer of real estate whether this transfer is evidenced in a written
document or not. Transfer of real estate located abroad will not be subject to
Luxembourg gift tax even if the notarial deed is passed in Luxembourg
 donations of movable assets only to the extent that these donations are evidenced
in a notarial deed passed in Luxembourg, wherever the assets are located.
Indirect gifts (i.e. abandonment of usufruct right) or hidden donation are also subject
to gift tax to the extent that the related transaction is stated in a written document
submitted to registration.
1.3.
Tax avoidance
The inheritance tax law contains several specific anti-avoidance provisions, which
aim to requalify certain operations as legacy. For instance, assets transferred without
any consideration during the year preceding the death of a resident of Luxembourg
are deemed to be part of the estate for inheritance tax purposes except if the gift was
registered and accordingly gift tax paid. Are also part of the legacy assets disposed off
by the deceased during a three-month period preceding the death if the deceased held
the usufruct of the assets or if the consideration for the disposal was a life annuity. A
debt which is only acknowledged in the will be considered as legacy.
More generally, the law dated January 28th, 1948 introduced a reporting obligation on
third parties particularly on banks and other professionals in the financial sector.
Those third parties are required before transferring the content of bank safety boxes or
cash deposits to inform the tax authorities about the content of the safety boxes
respectively of the bank accounts. This reporting obligation does not cover
inheritances, which are tax-exempt (i.e. direct line inheritance)
1.4.
Determination of tax liability : Valuation and exclusions
Inheritance and estate tax
Inheritance tax is levied on the value of all property transmitted upon death of the
owner. The property includes all movable and immovable assets, located within
Luxembourg or not, and is determined according to the civil law rules (not according
to an economic perception of the situation). The tax is levied on the net value of the
property going to each heir and is not levied on the estate as a whole.
In addition to the exemptions aiming to avoid double taxation (see 2.1) and the
exemption for inheritance in direct line and between spouses (see 1.5), there a
numerous exemptions such as those to the Luxembourg State, social security and a
number of charitable and cultural institutions. Industrial patents are excluded from the
taxable basis.
Liabilities existing at the date of the death are deducted from the amount of assets
transferred. Those liabilities include debt linked to the professional activity of the
deceased, debts stated in legal documents including accrued interest, domestic
expenses, funeral expenses, etc.
In principle the assets are valued at fair market value at the time of the death.
However, for some assets (perpetual ground rent, life annuity, usufruct and bare
ownership, etc) specific valuation rules apply.
With respect to estate tax, the tax is due on the fair market value of the real estate
located in Luxembourg. Deduction of related charges or debts is not admitted.
Gift tax
Since the registration law does not include an exception with respect to the valuation
of the gifts, the general rule apply i.e. the gift tax is levied on the fair market value of
the assets transferred.
The gift tax is assessed on the gross value. Deduction of charges or debts is not
allowed even where the payment of the charges and debts is transferred to the donee.
1.5.
Rates and tax-free base amounts
Inheritance and estate tax
The tax rate depends on the degree of relationship between the deceased and the heirs.
The rates applicable to inheritance amounting to less than LUF 400,000 – Euro
9,916) are listed in table 1. The amount of inheritance tax resulting from the
application of those rates is increased by a fraction for all amounts exceeding LUF
400,000 per beneficiary. This fraction varies between 1/10 (applies to amount
comprised between LUF 400,000 – Euro 9,916 and LUF 800,000 – Euro 19,831) and
22/10 (for inheritance exceeding LUF 70,000,000- Euro 1,735,255). These
progressive fractions apply to the total inheritance2.
There is complete exemption of inheritance tax where the total assets do not exceed
LUF 50,000 – Euro 1,240. Moreover, the inheritance tax law provides for full
exemption in two cases :(i) inheritance between spouses where they have living
children or descendants and (ii) inheritance between direct lineal ascendants and
descendants to the extent of the legal devolution.
Gift tax
The tax rate depends on the relationship between the donor and the donee. The rates
are detailed in table I.
2
For example, if a person inherits from his/her brother assets amounting to LUF 1,900,000, the
inheritance tax due is LUF 126,000  LUF 1,900,000*6%*1.4 ; 4/10 is the fraction applicable to
inheritance comprised between LUF 1,600,000 and 2,000,000.
Table I
Family relationship
Inheritance
estate tax
2.5% and 5%3
Direct line
5%4
Between spouses
6%
Brothers and sisters
9%
Uncles/aunts and nephews/nieces
Grand-uncles/aunts
and
grant- 10%
nephews/nieces
15%
Others
1.6.
and Gift tax
1.8% (2.4% or 3%)
4.8%5
6%
8.4%
9.6%
14.4%
Striking features
The Luxembourg inheritance tax (“droit de succession”) differentiates from the other
countries inheritance/estate tax system with respect to inheritance in direct line and
between spouses. Under Luxembourg law such inheritance are tax exempt. The direct
line inheritance tax exemption is, however, limited to the legal devotion. The
inheritance between spouses is tax exempt provided they have children or
descendants. Those exemption do not apply do the estate tax (“droit de mutation par
décès”). The inheritance tax is considered in Luxembourg to be a substitute income
tax, since the income received upon inheritance or donations is excluded from the
income tax on the grounds of that tax not being able to cope with the particularity of
the family relationship that typically exists in those circumstances, the principle
being that the closer the family relationship, the lesser the taxation. The inheritance
tax, unlike the income tax, is able to take the family ties into account, when
determining the tax liability. In that regard, there exists almost like an axiom in the
Luxembourg way of looking at things, that a) the income earner does not work only
for himself, but also for his family, to which he will pass his income over at some
point in time, and b) that close families (spouses, the children) do already enjoy to
some extent the benefits of the income earned by the income earner whilst he is still
alive (they live in the same house, use his personal wealth to take holidays, etc.).
Therefore, to some extent, it could be held that the wealth that is legally transferred to
the spouse and/or children upon death of the income earner is only formally
transferred to them at that point in time, the economic benefits of the deceased’s
assets having been passed over to his beneficiaries long time before then. Hence the
absence of taxation of the wealth passed over to the spouse and/or the descendants.
2. Double tax relief
2.1.
Unilateral relief
Luxembourg has not yet concluded any conventions aiming to avoid double taxation
with respect to inheritance tax or gift tax.
3
On the part exceeding the legal devotion (the legal devotion is tax exempt).
Without descendants otherwise exemption. If inheritance tax is due, the surviving spouse benefits
from an allowance of LUF 1,500,000 – Euro 37,184.
5
Rate is reduced by half if gift is made in a prenuptial agreement
4
The internal inheritance tax law includes some provisions aiming to reduce double
taxation. According to those provisions, the following assets fall outside the scope of
the Luxembourg inheritance tax :
 real estate located outside Luxembourg even if the deceased owner was resident
of Luxembourg
 movable assets located abroad provided those assets were effectively subject to
inheritance tax abroad solely on the basis of the nationality of the deceased.
2.2.
Double tax treaties
Luxembourg has not yet concluded any convention with regard to inheritance/estate
or gift tax, since it avoids by and large the double taxation via its internal legislation.
3. EU law
The Luxembourg tax rules in our opinion, although being old-fashioned, do not
collide with the EU Treaty’s provisions on free movement (art 39, 43, 49 and 56-58).
Non residents who are subject to the estate tax only pay taxes on real estate that is
located in Luxembourg in addition to the inheritance tax they may have to pay in their
country of residence. This puts non residents in exactly the same position than
residents who own real estate abroad, if we assume that the foreign jurisdiction does
not levy (just like Luxembourg) inheritance tax on real estate situated abroad, here
Luxembourg.
The same is applicable to residents of Luxembourg, especially since there exist no
exit taxes that would be levied upon the change of residence of Luxembourg
residents, either shortly before their death, or at all.
The only criticism that may be done as regards the Luxembourg tax system is its
absence of double tax treaty network. That absence may however be explained by the
fact that the unilateral relief is rather comprehensive, and the absence of taxation of
inheritance between spouses and descendants, that exemption also applying to non
residents.
4. Case
Individual X who

Is domiciled in country A (domicile to be understood in its Anglo-Saxon meaning)

Is a national of country B that was left by the individual within the last 10 years

Is a resident of country C

Has situs property in country D

Deceased during a holiday in country E
Would your country tax if it were in the position of :
Country
A
No
Country
B
No
Luxembourg only levies inheritance or estate tax (i) upon death of a
Luxembourg resident or (ii) upon transfer of real estate located in
Luxembourg on death of a non-resident. Domicile or nationality of
the deceased are not part of the criteria used for levying tax.
Country
C
Yes
Inheritance tax will be levied on all the property of the deceased
except real estate located abroad
Country
D
Yes
Luxembourg will only levied estate tax on immovable property
Country E No
Luxembourg, 8 May 2000