German inheritance and gift tax (Part 2)

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. This is part 2 of a series of articles.

Tax liability in Germany

Inheritance tax law is determined fundamentally by two factors. The first is the taxable person, which under German inheritance tax law can be the testator (and in the case of gifts, the donor) and the transferee (heir, legatee, beneficiary of a compulsory portion, giftee). The second factor is that the assets are transferred free of charge. Purely domestic situations only exist if all persons involved have their sole residence or permanent abode in Germany and the entire transferred assets are located in Germany.

Cross-border situations always exist if the following scenarios apply:

• The parties involved are resident in Germany and abroad. This is the case, for example, if the testator is resident in Germany and the heir is resident abroad.
• Special legal consequences arise if the parties themselves are resident in two or more countries. This is the case, for example, if a person is resident in several countries.
• The participants are resident in Germany and foreign assets are to be transferred.
• The participants are resident abroad and domestic assets are to be transferred.

Inheritance tax is only levied in Germany in exceptional cases if neither the parties involved are resident in Germany nor domestic assets are transferred. This applies, for example, to civil servants living and working abroad or for German citizens for a period of five years after leaving Germany.

Note: If German citizens move to the USA, the period is ten years after moving away.

If the testator, the donor or the recipient have their home or habitual abode in Germany, there is an unlimited tax liability. In the case of unlimited tax liability, worldwide assets are included in the calculations.

Persons with limited tax liability are those who have neither their home nor their habitual abode in Germany. Only the domestic assets of these persons are taxed.

Tax classes

The level of taxation in Germany depends essentially on the family relationship between the transferor (testator, donor, etc.) and the recipient (heir, legatee, giftee, etc.). The closer the family relationship, the more advantageous is the tax regime (e.g. in terms of tax rates, personal allowances, etc.). There are three different tax classes in German inheritance tax law:

Tax exemptions and allowances

There are various material and personal tax exemptions. A material tax exemption is, for example, covering household effects up to a value of 41,000 Euros. There are also full or partial exemptions for business assets, significant investments in corporations and residential property.

The following personal allowances are available for persons with unlimited tax liability:

Under certain conditions, the spouse can claim a special pension allowance of 256,000 Euros. For children up to the age of 27, graduated pension allowances are granted according to age.

Persons with limited tax liability can claim corresponding allowances under certain conditions.

Tax rates

The tax rates depend on the tax bracket and the amount of taxable income.

Valuation

The valuation is generally based on the fair market value. There are special valuation rules in particular for business assets, real estate and shares in corporations.

Deduction of debts

Debts of the deceased can be deducted if they are related economically to the taxable assets. The heirs can also deduct legacies. In addition, inheritance debts such as funeral costs, costs of the grave memorial and the usual grave care costs and costs of settling the estate can be deducted. In the case of gifts, the same debts can generally be deducted, with the exception of inheritance-related debts.

In contrast to other countries, debts relating to taxable domestic assets can also be deducted in the case of limited tax liability.

Ten-year period

If a person receives several acquisitions from another person within a ten-year period, these must be added together. If an heir has received gifts within ten years prior to the death of the deceased, all assets (inheritance share and gifts) must be added together. If gift tax was levied on earlier acquisitions (gifts), this must be offset against the final tax.

Note: As soon as the ten-year period has expired, a person can utilize possible tax allowances again. In such situations, personal allowances can be used several times within the family group if the ten-year period has elapsed.

Obligation to notify

Every recipient (and in the case of gifts also the donor) must report a taxable transfer. The deadline is three months after becoming aware of the taxable transaction. The notification must also be made if it is obvious that no tax will arise due to allowances. Foreign recipients and, where applicable, their legal representatives (e.g. the trustee of an Anglo-American trust) are also obliged to notify the tax authorities.

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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