Jump to main content

German inheritance tax: sanctions for non-residents to be reconsidered by the ECJ

Inheritance law

German inheritance tax: sanctions for non-residents to be reconsidered by the ECJ

Inheritance tax is a non-harmonised tax at European level, excluded from the scope of the European Inheritance Regulation (No. 650 of 2012) and for which each State sets its own conditions, limits, rates, allowances, with the consequent risk of double or even triple taxation if the inheritance has links to several States (place of residence of the deceased, place of residence of the heirs, place where the assets are located). In order to limit the burdens, some states have concluded bilateral double taxation agreements, but this has not been done between Italy and Germany.

Considering that the tax rates in Germany are between 7 and 50%, whereas in Italy they are at most 8%, the taxpayer's interest in limiting the impact of the German inheritance tax on his inheritance as far as possible becomes understandable.

 German law (§ 2 ErbStG) provides that if neither the heir nor the testator is to be regarded as resident or ordinarily resident in Germany, only the assets deemed by law to be located in Germany (§ 121 BewG) are subject to inheritance tax in Germany. It also stipulates that the tax-free amounts (e.g. 500,000 euros for spouses, 400,000 euros for children) are not to be applied in full but proportionately to the deceased's total assets (also abroad), and that liabilities may only be deducted if they are economically linked to the assets located in Germany. These controversial rules are already the result of an earlier ruling of the European Court of Justice (ECJ C 181/12), but will be referred to the European Court of Justice again following a referral by the Düsseldorf Fiscal Court (decision of 20 July 2020 4 K 1095/20 Erb).

 The testator was an Austrian citizen resident in Austria who died in 2018 and had appointed his daughter, also resident in Austria, as his sole heir. The inheritance consisted of four properties in Germany, liquid capital and a property in Spain. The heiress had to pay a sum of money to settle the compulsory rights of the spouse and another child of the deceased. She then filed the declaration of inheritance in Germany, in which she requested that the entire tax-free amount of 400,000 euros intended for her as a daughter and part of what she had paid to the beneficiaries of the compulsory portion (spouse and brother) be deducted in proportion to the share of the estate located in Germany in the total estate.

The German tax office, on the other hand, assessed the tax without deducting the asserted liabilities, as these were not economically related to the assets located in Germany, and only recognized a proportion of the deductibility of the allowance in relation to the proportion of the value of the German assets in relation to the total assets.

The heir brought an action against this determination before the Düsseldorf Tax Court, which stayed the proceeding and then asked the European Court of Justice to examine whether the principles of the European Union, in particular the right to free movement of capital (Art. 63(I) and 65 of the Treaty on the Functioning of the EU) conflicts with the legislation of a State which subjects the taxation of an acquisition by inheritance to different treatment, both as regards the allowance to be applied and as regards the deductibility of liabilities, depending on whether the person concerned is a resident of that State or a non-resident. We will keep you informed about the decision of the European Court of Justice.

Finally, we would like to remind you that for the purposes of inheritance and gift tax law, the status of a person who is domiciled or habitually resident in Germany remains for five years after transferring his or her domicile or habitual residence abroad if that person is a German national. Interestingly, the Munich Fiscal Court has ruled that this different treatment of German and foreign nationals does not violate either German constitutional law or EU law (ruling of 3 July 2019 4 K 1286/18).