German Inheritance Tax Abroad & International

Estates with foreign assets or of foreigners or Germans with foreign domicile

In the case of estates with a foreign connection (domicile, habitual residence, nationality, foreign assets), questions of inheritance tax (declaration obligations, double taxation) and also the inheritance statute must regularly be clarified. From a German tax perspective, there is a duty to declare and the applicability of German inheritance tax law if there is an unrestricted, extended unrestricted or restricted inheritance tax liability under the Inheritance Tax Act.

As a law firm for german tax law, inheritance law and succession with an international orientation, we advise you on important legal and tax issues in inheritance cases with a foreign connection - from the planning of the inheritance to the settlement.

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Unlimited inheritance tax liability for german residents

As soon as the testator or the heir is a resident at the time the tax arises, unlimited tax liability applies to the entire accrual of assets. It is therefore sufficient for one of the parties involved to be a resident of Germany. A person is considered a resident if he or she has a domicile or habitual residence in Germany.

A residence can also be a vacation home or a vacation apartment (secondary residence). Unlike in some other countries, a domicile in Germany can also exist if the testator, donor or acquirer has stayed in Germany for less than 180 days. Habitual residence requires a not substantially interrupted stay of 6 months in Germany, if necessary also over two 2 calendar years.

The choice of an inheritance statute (under inheritance law) has no effect on the inheritance tax liability.

In other countries, the inheritance tax liability may also be linked only to the nationality (for example: USA).

Extended unlimited inheritance tax liability

For German citizens who have not moved away from Germany for more than five years, the extended unlimited tax liability applies. An extension to 10 years results from the Foreign Tax Act for certain assets if the German national is resident in a low-tax country (income taxes) or is not resident in any foreign territory (digital nomads).

For German nationals who receive wages from a domestic fund (embassy staff, members of the German Armed Forces, etc.) and their dependents with German citizenship living in the same household, this applies without any time limit.

Limited Inheritance Tax Liability

Anyone who is not considered a resident is subject to inheritance tax liability on domestic assets.

Domestic assets include:

  1. Domestic real property (real estate, land, hereditary leases)
  2. Domestic business assets (sole proprietorship, shares in partnerships (GbR, OHG, KG) permanent establishments, permanent representative)
  3. Shares in a corporation (GmbH or AG) with its registered office or management in Germany, if the shareholder - possibly together with related parties - holds at least a 10% interest - indirectly sufficient.
  4. Inventions, utility models and topographies registered in a German book or register
  5. assets which are transferred to a domestic business (leasing, renting)
  6. Receivables, etc. secured by domestic real estate or ships in the German ship register.
  7. Receivables as a silent partner or arising from a participating loan, if the debtor has his domicile, habitual residence, registered office or management in Germany
  8. has rights of use to one of the above assets

Foreign assets from a German perspective

Foreign assets are covered by the German inheritance tax obligation and must be declared in the inheritance tax return. This raises questions of valuation (proof) and, in the case of business assets, questions of preferential treatment for inheritance tax purposes.

Foreign foundation assets and trusts present special challenges.

Double taxation in international inheritance cases

If assets exist abroad which are taxed by the foreign state and if there is unlimited tax liability - also - in Germany, Germany credits the foreign inheritance tax unless a double taxation agreement for inheritance tax has been concluded with a different regulation.

The crediting of foreign tax is more complex than it appears at first glance. It starts with whether the foreign tax is an inheritance tax at all, for example, some states impose ad valorem taxes, registration fees. In many cases, the regulations on crediting lead to no or only partial crediting (crediting gap). Time delays can also lead to the loss of the crediting possibility of the foreign tax.

A bilateral regulation of double taxation can only be found - in contrast to income taxes - in seven inheritance tax double taxation agreements, namely with:

  • Double taxation agreement with Denmark of 22.11.1995
  • Double taxation agreement with France of 12.10.2006
  • Double taxation agreement with Greece of 18.11.1910 / 01.12.1910
  • Double taxation agreement with Sweden from 14.07.1992
  • Double taxation agreement with Switzerland from 30.11.1978
  • Double taxation agreement with the United States of America (USA) of 03.12.1980

Not all double taxation agreements also apply to gifts.

Arrangements in the case of limited tax liability

If there are assets with limited tax liability, then it can be considered whether this and thus sometimes surprisingly high inheritance tax burden can be prevented by appropriate (evasive) structuring. In particular, if there is limited tax liability here in Germany or, as a person with unlimited tax liability in Germany, there is limited tax liability abroad (vacation homes).

Civil, inheritance and corporate law issues in cross-border cases

In cross-border cases, in addition to taxation, a variety of legal questions arise, in particular with regard to the applicable law of succession, such as, for example, will a will or contract of inheritance be recognized there at all? Which law of succession is relevant? You can find more information here: Inheritance Law Abroad

Criminal law risks

There are high risks of criminal prosecution if notification and declaration obligations are ignored - especially due to the extended unlimited tax liability - or if foreign assets (for example real estate abroad) are not declared. Since inheritance tax burdens of more than €50,000 are quickly reached in inheritance tax, there is a threat of severe penalties. In the case of an evaded tax of more than € 50,000, there is already, as a rule, tax evasion on a large scale.

In particular, the alleged abandonment of the residence before the expected death of the testator or the acquirer is critically scrutinized in practice by the tax authorities.

Degree of relationship Tax-free inheritance  
Spouses and registered partners 500.000 EUR  
Children and stepchildren 400.000 EUR  
Grandchildren 200.000 EUR  
Siblings, nephews, nieces, parents, grandparents, stepparents, parents-in-law, children-in-law, divorced spouses 20.000 EUR  
All other heirs 20.000 EUR  

However, the tax-free amount only applies in full if no gifts were made to the heirs concerned in the 10 years prior to the death of the testator. This is because in the event of the death of the donor, the inheritance tax is calculated on the inheritance now accruing to the donee, taking into account any gifts. This means that the gift tax "uses up" the exemption amount of the inheritance tax, so to speak.

Here you can find more information on the topic: Gift tax allowances

Pension allowances

In the case of an inheritance, spouses, children and stepchildren are entitled to a special pension allowance pursuant to Section 17 of the Inheritance Tax Act (ErbStG) in addition to the personal allowances. Children are only granted this allowance depending on their age and in staggered amounts up to the age of 27. The allowance for children also applies to stepchildren and adopted children. It is also available to grandchildren if their parents are already deceased.

Degree of relationship Tax-free inheritance  
Spouses and registered partners 256.000 EUR  
Children up to 5 years old 52.000 EUR  
Children between 6 and 10 years old 41.000 EUR  
Children between 11 and 15 years old 30.700 EUR  
Children between 16 and 20 years old 20.500 EUR  
Children between 21 and 27 years old 10.300 EUR  

The tax-free allowance can only be claimed in full if the surviving dependant does not receive any other tax-free pension benefits, such as a widow's or orphan's pension. If this is the case, the respective capital value is deducted from the pension.

Allowances for household effects and works of art

Spouses, children or life partners can inherit household effects up to a value of EUR 41,000 tax-free - this allowance applies for inheritance tax as well as for gift tax.

Household effects is a generic term for a large number of movable items that serve private household and lifestyle purposes. This includes all home furnishings, such as furniture, pictures, books, electrical appliances, tableware, sports equipment, gardening equipment or tools, as well as personal items such as linen, clothing or musical instruments. Household effects do not include vehicles of any kind.

For other movable tangible property, the allowance is EUR 12,000. This includes in particular jewelry, works of art (which are not household effects) and leisure items such as a racing bike, motorboat or riding horse.

Other purchasers, i.e. grandchildren, stepchildren, etc., can acquire household effects and other movable tangible property up to a value of EUR 12,000 tax-free.

Tax-free allowance for owner-occupied real estate

First of all, it is necessary to consider to which persons a property is inherited. This is because there are considerable advantages for spouses (or registered partners) and children. They can inherit real estate without having to pay taxes. The prerequisite is that

  1. the property is lived in by the testator until the inheritance takes place,
  2. the property is occupied by the heir for at least ten years after inheritance, and
  3. the living space of the property does not exceed 200 square meters (only in the case of inheriting children - in the case of inheriting spouses, the dimensions of the living space are irrelevant).

If the property is sold or rented out before the end of this ten-year period, inheritance tax is payable retrospectively. This is based on the value that the property had at the time of inheritance.

For all other heirs, the house or apartment is treated as capital assets and taxed accordingly. Inheritance or gift tax is only due on ninety percent of rented property: a so-called valuation discount of ten percent is granted.

Here you will find further information on the valuation of real estate for inheritance and gift tax.

Exemption amounts for business assets

In the case of gifts or inheritance of business assets, the ErbStG provides for such sensitive exemptions from inheritance and gift tax that their constitutionality is repeatedly the subject of court proceedings. The relevant provisions in sections 13a, b ErbStG are long and complicated. Therefore, in advance in brief: Beneficiary business assets are "spared" from tax if the heir or donee meets certain criteria (retention period, payroll) in the future.

There are various options here for business succession, which those affected can choose in individual cases. To make the right choice, you should definitely consult your tax lawyer in each individual case. In the following, however, we present the requirements of the standard case.

  1. The exemption deduction
    In the case of the standard exemption, the exemption discount amounts to 85 percent of the beneficiary assets listed in Section 13b (1) of the German Inheritance Tax Act (ErbStG) (referred to here in simplified form as productive assets). This means immediate taxation of 15 percent of the taxable business assets.
  2. The attachment rule
    If the business is then continued by the heir or donee for at least five years (known as the bonding rule), the remaining 85 percent remains tax-free after five years. A sale of the business, the cessation of operations or the disposal of essential business assets causes the loss of the exemption. However, this does not apply to the sale of a business if the proceeds of the sale are reinvested within six months.
  3. No excess withdrawal
    An excess withdrawal is also detrimental if the successor to the company - viewed cumulatively - withdraws more funds from the company by the end of the retention period than it generates in profits. An excess withdrawal of up to EUR 150,000 is considered harmless (Sec. 13a (5) No. 3 Inheritance Tax Act)
  4. The payroll clause
    Furthermore, the tax exemption only applies if the so-called payroll clause is complied with. The requirement is met if the sum of wages and salaries during the five years - taken together - is at least 400 percent of the original initial payroll. Initial payroll is the average of the last five fiscal years prior to the year in which the tax is incurred. Therefore, the decrease in the payroll must not exceed 20 percent for the entire period.
  5. Additional deduction amount of EUR 150,000
    Finally, in the case of the standard exemption variant, the administrative assets must be below the 50 percent limit. Although the tax on these non-benefited administrative assets is due immediately, the law provides for an additional deduction amount of EUR 150,000 (Sec. 13a (2) Inheritance Tax Act). The deduction amount of 150,000 euros is melted down if the value of these assets exceeds the value limit of 150,000 euros. The meltdown takes place in such a way that half of the exceeding value reduces the deduction amount.

But beware: The above-mentioned legal situation only applies from 31.12.2008. For transfers before this date, be sure to consult your specialist tax lawyer about the old legal situation.

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