German inheritance and gift tax (Part 3)

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 3 of a series of articles.

The treatment of spouses in German inheritance tax law

German inheritance tax law is based on the gratuitous transfer of assets. As an acquisition tax, it takes particular account of the family relationship between the transferor and the transferee, for example between the testator and the heirs.

From the perspective of German inheritance tax law, the surviving spouse is the person who benefits the most. The surviving spouse falls into tax class I, for which the lowest tax rates apply. Additionally, the surviving spouse has the highest personal allowance of 500,000 euros. The spouse also receives an additional pension allowance. The pension allowance will be reduced by the cash value of pension payments not subject to inheritance tax. These are, for example, payments from statutory pension insurance or survivors' benefits from a company pension.

Another special feature results from German matrimonial property law. In Germany, spouses can choose between three different matrimonial property regimes. In the case of a community of property, the assets of both spouses become joint assets. In the case of separation of property, the assets of both spouses remain strictly separate in terms of both administration and value. Unless the spouses agree otherwise, the statutory matrimonial property regime (community of accrued gains) applies.

The community of accrued gains is the matrimonial property regime of the separation of property with a claim to equalization at the end of the marriage. The following statements apply equally at the end of a civil partnership. The increase in value during the existence of the marriage must be equalized. In order to do this, the assets of both spouses at the beginning and at the end of the marriage must be determined separately. The spouse who has achieved the higher increase in assets must compensate the spouse with the lower increase in assets for half of the difference between the two increases in assets. The equalization claim is a monetary claim.

In the event of the death of one of the spouses, there is often no equalization claim, for example because the surviving spouse becomes an heir. Nevertheless, the surviving spouse can have a fictitious equalization claim. This corresponds in value to the amount that the spouse would be entitled to during their lifetime. If an equalization claim arises during the lifetime of the spouse, it is not subject to gift tax.

In an international context, complex situations can arise when German inheritance law, inheritance tax law and matrimonial property law clash with the respective foreign law. For marriages entered into before 28.01.2019, German matrimonial property law applies if both spouses are German nationals. If one of the spouses has a different nationality, German matrimonial property law applies if the spouses' habitual residence was in Germany at the time of the marriage. If no other matrimonial property regime can be chosen by contract, the matrimonial property regime at the time of the marriage remains applicable under German matrimonial property law. Foreign matrimonial property law is often based on the first matrimonial domicile, whereby changes of domicile can also lead to a change in the applicable law.

In order to be able to assert the above-mentioned fictitious equalization claim in Germany, it will generally be necessary to apply German matrimonial property law. This is possible through the spouses' choice of legal form. Today, it is also possible to select a legal form with retrospective effect to the time of the marriage, at least in the EU area, due to the EU Regulation on matrimonial property regimes.

The following example shows the problems that can arise:

Jordanian J and German D got married in 2015. Both had their habitual residence in Jordan at the time of the marriage. As they did not enter into a matrimonial property regime agreement, the statutory matrimonial property regime of separation of property applicable in Jordan applies.

The spouses move to Germany in 2020. The spouses can now agree, at least under German law, that German matrimonial property law should apply. If the community of accrued gains is then applied retrospectively, the non-taxability of a compensation claim can also be achieved.

Notes:

(1) Particularly in the case of marriages between partners of different nationalities, it should be clarified at the time of the marriage which matrimonial property law and which matrimonial property regime is to be applied.

(2) In many European countries, the statutory matrimonial property regime is the community of achievements (e.g. Switzerland). It has not yet been clarified whether the dissolution of a community of accrued gains is equivalent to the dissolution of a community of achievements for inheritance tax purposes. In other EU countries, this is  likely to be due to the rights of free movement within the Union. It is unclear whether it also applies to non-member states such as Switzerland.

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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