When does the German inheritance tax liability apply?
German inheritance tax law distinguishes between individuals who are resident in Germany and individuals who are resident abroad.
The so-called tax residents are subject to unlimited inheritance tax liability. It is sufficient that either the testator or the heir had their residence in Germany at the time of the inheritance.
Foreign taxpayers are subject to a restricted inheritance tax liability according to § 2 para. 1 no. 3 of the German Tax Code(ErbStG, Erbschaftssteuergesetz). The German tax office is interested in domestic assets according to § 121 of the Valuation Act (BewG, Bewertungsgesetz). In principle, not the entire inheritance is taxed in this case, but only certain assets that have a connection to Germany.
According to § 121 of the Valuation Act, domestic assets include (conclusively):
- domestic agricultural and forestry assets;
- domestic land and buildings;
- domestic business assets. Such assets are deemed to be assets serving a trade or business carried on in Germany if a permanent establishment is maintained in Germany for this purpose or a permanent representative has been appointed;
- shares in a corporation if the company has its registered office or management in Germany and if the shareholder, either alone or together with other persons closely associated with him or her directly or indirectly holds at least one tenth of the share capital or nominal capital of the company;
- inventions, utility models and topographies not covered by No. 3 which are registered in a domestic book or register;
- assets not falling under Nos. 1, 2 and 5 which are entrusted to a domestic business enterprise, in particular which are rented or leased to such business enterprise;
- mortgages, land charges, annuity debts and other claims or rights if they are directly or indirectly secured by domestic real property, by domestic rights equivalent to real property or by ships entered in a domestic shipping register. Bonds and claims issued as partial debentures are excluded.
- claims resulting from participation in a commercial enterprise as a silent partner and from partial loans, if the debtor has his domicile or habitual residence, registered office or management in Germany;
- rights of use to one of the assets mentioned in Nos. 1 to 8.
The following are therefore not covered by § 121 BewG
- Private movable property such as household effects, cash, works of art, jewellery, cars or ships
- Private credit balances at domestic financial institutions
- Securities at a domestic bank
- Shares held by a private individual in a domestic corporation of less than 10%.
- Participation rights in an open-ended real estate fund
- Private loan claims, even if they are secured by a domestic property
- A claim for the transfer of ownership of a domestic property
Which tax allowances apply?
The same tax allowances apply to restricted inheritance taxpayers as to unlimited taxpayers according to § 16 para. 1 ErbStG. However, according to § 16, para. 2 ErbStG, the tax allowances are reduced by a partial amount. The partial amount corresponds to the ratio of the sum of the values of the assets acquired at the same time that are not subject to restricted tax liability and those assets not subject to restricted tax liability that have accrued within ten years from the same person to the value of the assets that have accrued in total. The previous acquisitions are to be assessed at their previous value.
According to § 17, para. 3 ErbStG, the pension allowance is granted in full in cases of restricted tax liability if administrative assistance is provided by the countries in which the deceased was resident or the acquirer is resident.
The lump sum for estate liabilities in the amount of 10,300 euros according to § 10, para. 5 ErbStG is also granted in cases of restricted tax liability of the acquirer. Debts and encumbrances are only deductible if they are economically related to the domestic assets, § 10 para. 6 sentence 2 ErbStG.
What tax structuring options are there for non-residents?
In its ruling of 23.11.2022 – II R 37/19, the Federal Fiscal Court (Bundesfinanzhof) has determined that a bequest claim for the transfer of a domestic property does not count as domestic property within the meaning of § 121 no. 2 BewG and is therefore not subject to restricted tax liability.
Accordingly, a bequest that is directed towards the transfer of a plot of land located in Germany is not equivalent to a domestic plot of land, since § 121 no. 2 BewG mentions domestic plots of land, but not claims that are directed towards the transfer of domestic plots of land.
The bequest is a claim under the law of obligations of the legatee against the heir or heirs, which must be fulfilled in rem. However, the object of the inheritance tax acquisition is exclusively the claim under the law of obligations.
Thus, it opens up the possibility for testators who are not residents and who are owners of real property in Germany to transfer this by will, free of German inheritance tax, to beneficiaries who are also not residents by way of bequest. Persons residing in Switzerland who are the owners of real estate in Germany can thus bequeath this real estate to persons also residing in Switzerland by way of bequest without incurring German inheritance tax.
Do you have questions about tax liability in your inheritance case? We will be happy to advise you on German, Swiss and cross-border inheritance tax law!