National Report on
Avoidance of Multiple Inheritance Taxation Within Europe
by Dr. Marc Jülicher
Attorney-at-Law, Flick Gocke Schaumburg, Bonn
1.1
Overview
a)
Germany levies inheritance tax on gratious death-time transfers and donations tax on
donations.
b)
Inheritance tax and donations tax have to be qualified as being based almost nearly
completely on the individual acquisition. So inheritance tax is levied on every heir’s
share of the estate or on every legacy. Several fictions complementing the law provisions on inheritances and donations, e.g. taxation of recipient’s acquisition of deceased
partner’s partnership interests, are taxed on every partner’s individual acquisition too.
Consequently, taxpayer is not the undivided estate, but every heir, legatee or donee, after division of the estate being liable only for his own tax burden. The only exception to
the rule is the “Substituted Inheritance Tax” (“Ersatzerbschaftsteuer”) on the assets of a
family foundation with seat in Germany which is levied like a mere wealth tax every 30
years without any transfer of assets.
c)
Inheritance tax (Erbschaftsteuer) and donations tax (Schenkungsteuer) are levied on
provisions of the ErbStG (Erbschaft- und Schenkungsteuergesetz = Inheritance and Donations Tax Code).
In addition, some provisions can be found in the BewG (Bewertungsgesetz = Valuation
Act) or in the AStG (Außensteuergesetz = External Tax Relations Act).
1.2
Criteria for Tax Liability
a)
Unlimited inheritance and gift tax liability results from the fact that either the deceased
or donor or the donee is a resident taxpayer upon his death or upon the making of the
gift. A resident taxpayer is any individual being domiciled or habitually resident in
Germany or any corporation, association or foundation having its statutory seat or its
place of principal management in Germany. In addition, extended unlimited inheritance
and gift tax liability is applicable for German nationals (as decedent, donor or donee)
who have been permanently resident abroad without having been domiciled in Germany
for up to five years, or German nationals without domicile or habitual residence in
Germany, but who are employed and paid by the German state or political or local subdivisions including their relatives being as well German citizens. In any other cases
there is only taxation because of situs. Not all assets being effectively situated in Germany are taxable, but only those named in Section 121 BewG. These assets are mainly
real estate situated in Germany, business assets located in Germany, shares in a corporation if the company has its seat or place of principal management in Germany and the
decedent or donor, either alone or together with persons closely connected with him in
terms of Section 1 Subsection 2 AStG, holds directly or indirectly at least 10 % of the
nominal or share capital of the company, as well as some immaterial rights.
Bank accounts with German banks, for example, are not subject to taxation because of
situs.
Extended tax liability (Section 4 AStG) applies if
- an individual person has been subject to unlimited tax liability for an aggregate period of at least five years during the last ten years prior to the end of his unlimited income tax liability as a German national
- and that such person is resident in a foreign territory where his income is subject to a
minor taxation only for income tax purposes or is not resident in a foreign territory at
all,
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-
and he has a major financial interest within the territory of Germany (= interest in a
commercial partnership even as a limited partner, if he receives more than 25 % of
the income of such company, shares of more than 25 % of share capital of a corporation).
Minor taxation is deemed if the income tax imposed abroad is less than 2/3 of the tax
which a non-married person with a taxable income of DEM 150,000 would have to pay
in Germany in the event of unlimited taxation. Low taxation for inheritance and
donations tax purposes is then deemed if the tax-payer cannot prove his taxation abroad
in this field exceeds 30 % of the German tax burden in the event of unlimited taxation.
Tax is due on all assets resulting in non-foreign income according to Section 34 c
Subsection 1 EStG (Einkommensteuergesetz = Income Tax Act). This applies to all
German assets.
b)
Domicile leading to unlimited tax liability is defined in Section 8 AO (Abgabenordnung
= General Tax Code) as a place where the taxpayer has a home under circumstances
from which it can be assumed that he will keep this home and use it. It is remarkable
that this home does not need to be his principal home. For instance, it was held by the
Federal High Tax Court that a home being used only five weeks annually and vacant the
rest of the year, is sufficient to be qualified as domicile according to Section 8 AO.
Habitual residence (Section 9 AO) is held if somebody stays at a place (e.g. a long-term
rented hotel suite) under circumstances from which it can be assumed that his stay at
this place is not only temporary. Any stay exceeding a duration of six months and
longer in Germany is deemed to lead to an habitual residence there (Section 9 Sentence
2 AO).
c)
Domicile and habitual residence give rise to unlimited tax liability. Nationality in combination with having been a resident taxpayer and not having abandoned residence for
longer than five years also entails unlimited tax liability. Contrary situs of assets can
cause only limited tax liability according to Section 121 BewG or (if extended) to Section 4 AStG.
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1.3
Tax Avoidance
In Germany several provisions exist to prevent tax avoidance. For example, life insurances are
taxable as financial advantage acquired by a third person from the decedent’s contract with a
life insurance company (Section 3 Subsection 1 No. 4 ErbStG). A Compensation for the right
of close relatives to compulsory portions of the estate (= Abfindung für Pflichtteilsverzicht) is
taxable as death time acquisition (Section 3 Subsection 2 No. 4 ErbStG) or lifetime gift (Section 7 Subsection 1 No. 4 ErbStG).
Acquisitions between the same persons are aggregated and integrated fully in the taxation of
the last acquisition (Section 14 ErbStG). Alleviations for business equity and for special art
objects made available to the public are cancelled if the assets are sold during a period of five
years (business assets) respectively ten years (art objects) after the acquisition (Section 13 a
Subsection 5, Section 13 Subsection 1 No. 2 Sentence 2 ErbStG).
Family foundations with their seat or place of principal management in Germany are subject
to a substituted inheritance tax every thirty years (Section 1 Subsection 1 No. 4 ErbStG).
There is jurisdiction of the Federal High Tax Court that quick-succeeding gifts circumventing
unfavourable tax classes directly can be regarded as undesirable gift-in-chain leading to direct
taxation of the last recipient according to his personal relationship to the first donor.
1.4
Valuation and Exclusions
a)
Property is normally assessed at market value. German real estate has for a long time
been assessed according to unitary values (= Einheitswerte) until these unitary values
were declared contrary to the constitution by verdict of the Federal Constitutional Court
because of then being far too low. Since 1 January, 1996, assessment is normally based
on annual return multiplied with the factor 12.5 for developed real estate and 18.6 for
real estate used for farming and forestry. There exist modifications especially for business real estate.
Business assets are assessed according to the values of the tax balance sheets, without
consideration of hidden reserves. For unlisted shares market value is either derived from
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sales within the last year or assessed by the „Stuttgart Method“ taking into account both
earning capacity and the assets (based again on balance sheets).
b)
The dwelling transferred between spouses inter vivos (not at the time of death) is taxexempted. Business assets and shares in corporations, the latter only provided that the
decedent or donor held directly more than 25 % in the nominal share capital of the company, benefit from an abatement of DEM 500,000 once per decedent or donor every ten
years and from a valuation-deduction of 40 % of assessed value. Bequests and gifts to
charitable organizations etc. are exempted from tax liability as well as art objects provided - among other stipulations - they are non-profitable and made open to public use.
1.5
Rates and Tax-Free Base Amounts (Reliefs)
a)+b) Rates and tax-free base amounts depend on the tax class applicable. All recipients are
grouped into three tax classes:
- tax class I: Spouse, children (including step-children), direct descendants and ascendants (the latter only in the event of death-time acquisitions),
- tax class II: Ascendants and direct ascendants in the event of gifts inter vivos, brothers and sisters, first degree descendants of brothers and sisters (nieces and nephews),
step-parents, sons-in-law and daughters-in-law, parents-in-law and the divorced
spouse,
- tax class III: All other recipients.
Allowances are for the spouse - legally married to the decedent or donor DEM 600,000, for children DEM 400,000, all other recipients in tax class I
DEM 100,000 and DEM 20,000 and DEM 10,000, respectively, in tax class II and III.
These provisions apply only in case of unlimited tax liability, in the event of taxation
because of situs there is a uniform abatement of DEM 2,000 regardless of relationship.
There exist additional allowances in case of acquisitions mortis causa, DEM 500,000
for the spouse and smaller amounts for children under the age of 27 being diminished
by capitalized interest and pensions and related benefits not subject to inheritance tax.
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The range of rates varies from 7 % to 30 % in tax class I, from 12 % to 40 % in tax class
II and from 17 % to 50 % in tax class III, each rate in any case applicable to the whole
acquisition, not to the top bracket.
Example:
M dies having been married to his spouse in accrual community. He leaves a fortune of
DEM 2 million. The spouse’s claim for accrual equalization is DEM 400,000. No will was
drafted.
If a person married under the matrimonial regime of accrual community dies intestate leaving
spouse and children, the spouse can claim ½ of the estate leaving the children to share the other
half. The spouse here does not pay inheritance tax on her 1 million share as DEM 400,000 are
free as accrual claim and DEM 600,000 as personal allowance. The children each pay inheritance tax of DEM 100,000 on their DEM 500,000 share being diminished by DEM 400,000 personal allowance.
c)
Community of property is no longer the regular matrimonial regime in Germany. Its
starting leads to a taxable gift to the poorer conjoint. In case of termination by death or
inter vivos ½ of the common property is attributed to each conjoint. Under the normal
accrual regime the poorer conjoint (depending on capital gains, not fortune) is entitled
to ½ of the surplus of the richer conjoint at termination of matrimonial regime. This
claim, diminished by inflationary claims and some other correctives, is tax-exempted.
There is no tax-exemption if conjoints live under the regime of separation of goods.
1.6
Striking Features
On the one hand, Germany derives unlimited tax liability not only from the decedent's or donor's status but also from the recipient's always including German citizens having abandoned
their domicile or residence in the last five years. On the other hand, Germany limits its taxation because of situs to selected internal assets expressively named in the Valuation Act. Personal abatements differ very much according to the recipient’s personal relationship to the
decedent or donor, the abatements for close relatives (spouse and children) being relatively
high in European terms. Business assets profit from a DEM 500,000 abatement and a valua-
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tion-deduction of 40 %. Immovable assets are not assessed at market value but on the basis of
annual returns being considerably lower.
2.
Double Taxation Relief
2.1
Unilateral Relief
a)
German Inheritance Tax Law contains the provision for claiming tax credit for foreign
inheritance and gift tax (Section 21 ErbStG) provided the taxpayer is subject to unlimited tax liability in Germany (taxation because of situs even if extended is not sufficient), provided Germany and the foreign state lack a tax treaty avoiding double taxation in relation to inheritance or gift tax. The foreign tax must have been paid for external assets within a deadline (no longer than five years before rising of tax liability in
Germany). Tax credit is limited to a maximum equal to the German tax burden on the
foreign property (per-country-limitation).
It is worth noting that Germany bases tax credit on two different understandings of foreign assets according to Section 21 ErbStG. If unlimited tax liability was derived from
the decedent’s or donor’s status, tax credit is limited to foreign tax on those assets
which would qualify for taxation due to situs if situated within Germany. That means,
e.g., that tax credit is granted for foreign real estate, not for bank accounts abroad. On
the other hand, if unlimited tax liability is derived from the recipient’s status only, tax
credit is granted for all foreign inheritance or donation taxes except those levied on assets being subject to taxation because of situs in Germany. For example, tax credit is
now granted for foreign taxes on bank accounts abroad or even on German bank accounts, but not on German real estate.
Two other particular facts have to be mentioned. Firstly, Germany requires the foreign
tax to be nearly materially congruent to German inheritance or gift tax, thus excluding
tax credit for Canadian „capital-gains-tax“ integrated in the decedent’s taxable income
during year of assessment in which he died. Secondly, recipients must have borne only
the economic burden of the foreign tax. There is no strict identity of tax subject required, thus allowing tax credit for estate taxes on the undivided estate levied by AngloAmerican countries and taxes being paid by a trustee.
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2.2
a)
Tax Treaties - Overview
Tax Treaty
Applicability from
Covering Inheritance Tax/Gift Tax
Greece
November 18, 1910 /
December 1, 1910
only inheritance tax
Austria
October 4, 1954
only inheritance tax
France
October 27, 1956
covering only inheritance tax between
France and the Saarland (Saarvertrag =
Sarre Treaty)
Switzerland
November 30, 1978
only inheritance tax (with exception for
business assets by mutual fiscal authorities’ agreement
Israel
May 29, 1980
no longer in force after abolition of inheritance tax in Israel
United States
December 3, 1980
both
Sweden
July 14, 1992
both
Denmark
November 22, 1995
both
A comprehensive treaty with Finland was paraphed on June 6, 1997, a non-comprehensive treaty with France on April 28, 1995, but is being re-negotiated. There has been a
complimentary agreement with the USA on December 15, 1998, not yet in force. Negotiations with the United Kingdom are under way, those with the Netherlands seem to
have been stopped.
b)
Some older treaties (Greece, Austria and Switzerland, the latter except business assets)
do not cover the gift taxes. The oldest treaty with Greece from 1910 renewed in 1953 is
the only one still to define the fiscal domicile for the purposes of the convention according to citizenship. It covers only movable assets, not real estate.
The tax treaty with Austria is very favourable for the taxpayer because it contains no
provisions for an upholding of Germany‘s or Austria’s innerstate taxation of recipients
being domiciled on the territory of the other treaty partner, not being the state of the deceased’s fiscal domicile for purposes of the convention. Extended unlimited tax liability
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of emigrated own citizens is not upheld either. Besides, the exemption method is used
exclusively.
On the contrary, only in the tax treaty with Switzerland, even if the fiscal domicile for
purposes of the Convention is in Switzerland, unilaterally Germany’s right to comprehensive unlimited taxation (überdachende Besteuerung = roof-taxation), extended
unlimited taxation or extended limited taxation because of the deceased’s status is
upheld permanently if the decedent still had a permanent home (ständige Wohnstätte)
for at least five years in Germany or upheld for a limited period if he had abandoned his
permanent home there for no longer than a period within five and six years back
dependent of the date of abandonment. In the second case there are exceptions for
Germans having left for Switzerland for marriage with a Swiss citizen or for starting of
dependent work. It has been held recently by the Federal High Tax Court that a
permanent home (= ständige Wohnstätte) must be a qualified domicile (Wohnsitz)
requiring effectively continuous use.
Furthermore, in all tax treaties except with Greece and Austria the right to full taxation
of the estate because of domicile or habitual residence in Germany of the recipient is
upheld, the details varying.
Partnerships interests can cause conflicts of differing qualification, if they are transparent in one legislation and opaque in the other. Therefore, e.g., in tax treaty with the USA
there exists a provision enabling a treaty-partner to tax a partnership’s real estate and
business assets on his territory, special provisions for trusts, abatements concerning the
acquisitions of spouses.
2.3
OECD-Model-Conform?
The tax treaties with Greece and Austria were concluded before the first OECD-model convention of 1966, the other tax treaties (Switzerland, the USA, Sweden and Denmark) are
broadly conform with the OECD-Model Estate Tax Convention, except for the above-mentioned deviations (see 2.2 b).
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2.4
Method to Avoid Double Taxation
Germany normally uses the ordinary credit method. As this leads to applicability of Section
21 ErbStG, tax credit is limited according to its restrictions, e.g. the per-country-limitation.
The exemption method Germany uses only with reservation of the progression in the tax treaties with Austria and Switzerland, in the latter only for real estate held by Swiss decedents.
On the other hand, Switzerland uses exclusively the exemption method in this treaty.
The old tax treaty with Greece is based on the exemption method too, without reservation of
the progression. It is widely held in Germany among legal authors that the reservation of the
progression in Section 19 Subsection 3 ErbStG is not sufficient if there is no corresponding
provision in the Double Taxation Treaty.
3.
EC Law
Only in the last few years has discussion on the impacts of EU-law on Inheritance Tax Code
begun, after a widely contested decision of the Düsseldorf tax court denying any possibility of
conflict.
German unlimited taxation of former German citizens having immigrated to EU-countries
touches freedom of movement and capital transfer inside the EU. Still in the end it has to be
considered EU-law-conform because there is no discrimination of foreigners compared to
people resident in Germany, but „only“ emigrating German citizens are treated worse than
emigrating foreigners. Only from the point of view of the EU-country of immigration not being crucial as a pure reflection the immigrant is subject to a higher tax burden than a longterm resident. Besides the German law is not contrary to the OECD-Model Convention as the
right of unlimited taxation is limited to five years, ten years being the maximum provided for
by the OECD.
Germany grants only a minimal personal allowance of DEM 2,000 in cases of taxation because of situs, while personal allowances in the event of taxation because of domicile can be
as high as DEM 1,100,000 for spouses (including the additional allowance counterbalanced
with non-taxable pensions). Two reasons are used in the attempt to justify this different treatment impeding free capital transfer to Germany: first that Germany taxes only a limited selection of the world-wide assets in cases of taxation of situs and second that any measures of
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alleviation must be provided for by the state of domicile. As some states don’t levy any inheritance tax - at least for acquisitions of spouses or children - or one considerably lower than
the German tax burden, this argument is at least not convincing in case of taxation because of
situs if the principal of the assets is in Germany. A parallel to Sec. 1 Subsection 3 EStG
(Einkommensteuergesetz = Income Tax Act) implemented after the "Schumacker case" in income tax law seems inevitable granting optional treatment as in the event of taxation because
of domicile, if more than 90 % of the assets are subject to German taxation.
It is not yet fully clarified how the protection against double taxation can be safe-guarded by
EU-law. A most-favoured-nation-claim could first lead to adaptation of less favourable double-taxation agreements towards taxpayer’s treatment in the most favourable one and on the
other side to appliance of principles of double taxation avoidance treaties on situations where
no tax treaty has been concluded. Up to now, German courts have not accepted a taxpayer’s
claim for full cover by double taxation avoidance treaties. But at least in case of unlimited
taxation only because of secondary abode in Germany withdrawal of German right of taxation
according to treaty principles seems unavoidable. Section 21 ErbStG (unilateral tax credit)
does not cover this conflict if the decedent or donor was subject to unlimited liability. In any
case Sec. 21 ErbStG is highly contestable because of the exclusion of any tax credit in the
case of unlimited taxation of the deceased or donor for assets situated abroad not being qualified as external assets according to Section 21 Subsection 2 No. 1 ErbStG (e.g. bank accounts).
Alleviation for business assets are restricted to German business assets, alleviation for shares
are restricted to companies with their seat in Germany. Attempted justifications that Germany’s economy should be boosted allowing exceptional restraint of free capital transfer by
tax laws are contestable because the different treatment of shares at least is based only on the
seat of the company and not on the situs of its assets. If the seat of a legal entity is compared
to citizenship of a natural person, conflict with EU-law prohibiting discrimination because of
citizenship is widely recognizable.
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4.
Case
Position of country A:
If in the position of country A Germany would tax because the decedent is considered an ordinary resident in Germany and unlimited tax liability is derived therefrom.
Position of country B:
Germany would tax because of extended unlimited tax liability, if X had left Germany as
German citizen within the last five years.
Position of country C:
Germany would tax because of unlimited tax liability as a secondary abode is sufficient for
this, and full taxation can only be excluded by Double Taxation Avoidance Treaty. It must be
mentioned that Germany has no statutory provisions for taxation on remittance basis, but derives unlimited tax liability from every habitual residence. That can lead to severe problems,
e.g. for foreign students (mainly as recipients) intending to study for a longer period in Germany.
Position of country D:
Germany would tax if property consisted of internal assets according to Section 121 BewG,
e.g. real estate, business assets or shares in corporations where the deceased held at least 10 %
of the nominal capital etc. Germany would not tax if the property consisted of assets not
mentioned in Section 121 BewG, e.g. bank accounts or shares in major public corporations
where the deceased held less than 10 % of the nominal capital.
Position of country E:
Germany would not tax because a temporary residence from a short-term holiday does not
satisfy the requirements of domicile or habitual residence. Nevertheless, if that holiday exceeds a period of six months, Germany probably would tax because of deemed habitual residence according to Section 9 Sentence 2 AO.
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