German inheritance and gift tax - International cases

Germany has an inheritance and gift tax that addresses inheritances and gifts in respect of taxation in a national and international context. This includes the transfer of assets from tax residents and non-residents. If the taxable persons are resident in Germany, the worldwide assets are subject to this tax (as an unlimited tax liability). In the case of non-residents, generally only German assets are taxed (as a limited tax liability), although there are exceptions, particularly for tax residents who transfer their domicile abroad. In a series of articles, we will describe the scenarios of cross-border inheritances and gifts from a German perspective.

German taxation system as compared to those of other countries:

Countries have very different taxation systems regarding unlimited tax liability:

• Some countries generally only tax a transfer to an estate that forms a legal entity separate from the persons involved. An inheritance is taxed as a whole (an estate tax). This is particularly the case in Anglo-American jurisdictions such as the USA, Great Britain or South Africa.
• Other countries tax the recipient of an inheritance or gift. The difference from estate tax is that the tax liability only applies to the heir or giftee. In contrast to other countries, Germany taxes both the descendant or donor, and also the recipient of an inheritance (in particular heirs or legatees) or a gift. Another difference from estate tax is that the family relationship between the testator or donor and the recipient influences the This has a particular effect on both the level of tax rates and the personal allowances applicable.

The way Germany taxes is clearly shown in the following example:

A testator who is resident in Germany bequeaths property in Germany to his two sons. Both sons live in the USA. No inheritance tax is levied in the USA because the deceased is not liable to pay tax in the USA (no estate in the USA) and no US assets are transferred. In Germany, the entire inheritance is subject to inheritance tax because the deceased was resident in Germany.

Almost all countries with an inheritance and gift tax also tax the transfer of domestic assets, even if the testator, donor or transferee is resident abroad. However, the regulations vary greatly from country to country. There are significant differences, particularly regarding the definition of what is to be classified as domestic assets.

There are also a number of countries that do not levy inheritance or gift tax at all. In some cases, the inheritance is taxed as part of income tax. These countries treat the transfer of assets as a deemed sale. This is for example the case in Canada and Sweden.

There are also differences in the determination of the taxable person. Almost all countries only tax persons who are resident in the respective country within the scope of unlimited tax liability. The USA is a major exception in this respect. It generally taxes its citizens or persons with permanent residence status in the USA (green card holders), even if they are not resident in the USA. Therefore, if the deceased in the above example were a US citizen resident in Germany, the USA would tax the estate.

In addition, the concept of domicile plays a decisive role in some countries, particularly in Anglo-Saxon jurisdictions. In the UK, the concept of domicile differs considerably from the term residency for persons born in the UK. Persons are still subject to UK inheritance tax due to their domicile of origin, even if they have been living abroad for some time. Further information on this can be found here.

The different definitions of a taxable person can lead to double taxation scenarios. For example, a British citizen living in Germany could be subject to unlimited tax liability both in Germany and the UK; in Germany due to their residence and in the UK due to their domicile of origin. In some cases, double taxation is prevented or mitigated by double taxation treaties. However, Germany only has a very limited network of double taxation agreements, namely with France, Sweden, Denmark, Greece, Switzerland and the USA. There is no such agreement with the UK.

The influence of civil law on inheritance tax

German inheritance tax is strongly influenced by civil law, particularly inheritance law and matrimonial property law. The economic approach customary in income tax law is only applied in exceptional cases. As German inheritance law also covers foreign situations, foreign civil law can also have an influence on the tax treatment in Germany.

Which civil law applies is determined by the private international law applicable in each country. There are two main systems in international inheritance law:

• Estate division: Under this system, immovable assets are always inherited on the basis of the inheritance law of the country in which they are located, while movable assets are inherited on the basis of the inheritance law of the country in which the deceased was domiciled at the time of death. This can lead to the application of two inheritance laws to one estate (a division of the estate). This applies above all to countries in the Anglo-American legal system.
• Unity of estate: In many other countries, the principle of unity of estate applies. This means that all assets, including all real estate, are only inherited in accordance with the law of one state. Since 2015, the EU Inheritance Regulation has been in force in the EU, with the exception of Denmark and Ireland. According to this, the law of the deceased's last habitual residence applies to the entire estate. If the testator is not resident in their home country at the moment of his death, he can choose to have his home law by making a will to that effect.

It is obvious that the different concepts can lead to conflicts. This is largely resolved by reference provisions.do we need to say what ‘reference provisions are’?

Another significant difference is the legal effect at the time of death. Under German law, the entire estate passes directly to the heir or heirs or a community of heirs at the time of the testator's death. This applies to both intestate and testamentary succession. To prove their entitlement, the heir must apply for a certificate of inheritance from the competent probate court. A will with an “opening note” is also sufficient. No further formalities are necessary, and in particular no probate proceedings are required. This is particularly different in Anglo-American countries. Here, the assets are transferred to the estate, which is represented by an administrator appointed by will or an administrator appointed by court order - both of these have wide-ranging powers. Once the probate proceedings have been completed, the remaining assets are distributed to the heirs or other beneficiaries. Unlike under German law, the heirs do not become the direct owners or possessors of the estate.

There are other areas in which the inheritance rights permitted by countries differ, sometimes considerably:

• There are countries in which relatives and spouses have a strong legal position in the event of inheritance. The strong position of children in particular is known in the Romanic legal system, where children cannot in practice be completely disinherited (e.g. Spain, France, Italy). On the other hand, there is the Anglo-American legal system, which grants the testator extensive testamentary freedom. The Central European - and therefore also the German - legal systems stand between the two extremes. In Germany, the testator can exclude both spouses and children from the succession. However, if this were to happen, spouses and children then have a statutory cash claim against the heirs in the amount of half of the inheritance share. is this claim upheld regularly or ? It may be worth adding “Sometimes this succeeds”
• Germany recognizes mutually binding wills. A particularly widespread one is the so-called "Berliner Testament", in which the spouses appoint each other as sole heirs. Inheritance contracts between the testator and the potential heirs are also permitted, in which the contracting parties stipulate the consequences of the inheritance during their lifetime. Corresponding reciprocal wills and contracts of inheritance are usually not permitted, particularly in countries of the Romanic legal system, and have no effect if the local inheritance law applies.
• In many countries, all legal dispositions that extend beyond death are prohibited. This is not the case in Germany. For example, beneficiaries may waive their inheritance or compulsory portion during their lifetime. In other countries, particularly in the Romanic legal system, such contractual arrangements are not permitted. Powers of attorney beyond death are also permitted in Germany, but not in other countries.
• Further differences result from the formal requirements for wills. In Germany, a will must be handwritten and signed by the testator. An exception to this only applies to wills that are drawn up before a notary. In other countries, there are sometimes significantly different regulations. For example, in some legal systems of the Anglo-American legal system, wills must be co-signed by witnesses.
• Germany has a uniform inheritance law throughout the country. This is different in other countries. For example, each US state or province in Canada has its own inheritance law. Great Britain does not have a uniform inheritance law either. England and Wales have one inheritance law, while Scotland has its own.

There are many other differences in inheritance law in different countries, but these are not the subject matter of this article at this time.

Authors:

Peter Scheller, Tax adviser, Master of International Taxation, Certified expert on customs and excise taxes

Rainer Scheller, Chartered Accountant, Tax adviser

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