National Report on
Avoidance of Multiple Inheritance Taxation Within Europe
by Dr. Marc Jülicher
Attorney-at-Law, Flick Gocke Schaumburg, Bonn
1.1Overview
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).
1.2Criteria 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,
-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.
1.3Tax 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 13a 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.
1.4Valuation 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 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 tax-exempted. 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.
1.5Rates 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 - DEM600,000, for children DEM400,000, all other recipients in tax class I DEM100,000 and DEM20,000 and DEM10,000, 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 DEM2,000 regardless of relationship.
There exist additional allowances in case of acquisitions mortis causa, DEM500,000 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.
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 DEM2million. The spouse’s claim for accrual equalization is DEM400,000. 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 1million share as DEM400,000 are free as accrual claim and DEM600,000 as personal allowance. The children each pay inheritance tax of DEM100,000 on their DEM500,000 share being diminished by DEM400,000 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.
1.6Striking 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 DEM500,000 abatement and a valuation-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
2.1Unilateral 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 Anglo-American countries and taxes being paid by a trustee.
2.2Tax Treaties - Overview
a) / Tax Treaty / Applicability from /Covering Inheritance Tax/Gift Tax
Greece / November 18, 1910 / December 1, 1910 / only inheritance taxAustria / 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 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.
2.3OECD-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).
2.4Method 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.