German Inheritance Tax

The article provides a short introduction to the Taxation of estates under the German Inheritance and Gift Tax Act without taking into consideration special rules under double Taxation Agreements.


The taxation of estates in Germany is codified in the German Inheritance and Gift Tax Act ( “Erbschafts- und Schenkungssteuergesetz", ErbSt). Additionally, other German tax laws, such as the General German Fiscal Code (Abgabenordnung) and the Foreign Tax Act (Außensteuergesetz) contain relevant provisions.

Taxation of Transfer of property on death

German inheritance tax but is imposed on any transfer of property at death , e.g.

  1. An inheritance, a specific bequest, a claim to the forced share
  2. Donation on death (donatio mortis causae),
  3. Transfer on death to a foundation or trust (see special article on taxation of trust under German tax law),
  4. Any compensation for a waiver of inheritance rights.

German inheritance tax does not tax the estate itself but the beneficiary must pay the German inheritance tax on all transfers in his favor.

Taxable Transfers in Germany

Unless a Double Taxation  stipulates otherwise, Germany taxes all worldwide transfers, if either the beneficiary or the deceased is a German taxpayer at the time of his death.

An individual is a German taxpayer if he or she has either a permanent home or a habitual abode in Germany.

  1. The permanent home does not necessarily have to be the principal home of the person. A taxpayer has a “permanent home” in Germany if he possesses a home in Germany under circumstances from which it can be assumed that he will keep this home and use it. The German High Court of Finance ruled that even a stay of several weeks may satisfy the “permanent home” requirement if is the individual’s residence is on a regular basis for several years. Thus, persons who own property in Germany may be unexpectedly subject to German Inheritance and Gift tax and in their country of origin.
  2. A habitual abode is found when an individual remains in a place (e.g. a long-term rented hotel suite) under circumstances from which it can be assumed that his stay at this place is not only temporary. Any stay exceeding six months or longer in Germany is deemed to lead to a habitual abode within Germany.

If the deceased or the beneficiary is a German national, he is deemed to be a German taxpayer for another 5 years after giving up a German residence or habitual abode (extended unlimited inheritance tax liability).

Situs taxation in Germany

If neither the deceased nor the beneficiary is a German taxpayer, the beneficiary will generally only be subject to German Inheritance Tax based on German situs property.

Please note: Non-residents and foreigners are subject to situs Taxation in Germany.

German situs property includes the following :

  1. domestic agricultural and forestry assets;
  2. domestic property assets;
  3. domestic business assets, meaning assets used in connection with an industrial or commercial activity in Germany, where a permanent business establishment is maintained for that purpose in Germany, or where a permanent representative has been designated;
  4. shares in capital companies, where the company’s registered office or central management is in Germany, and the shareholder, either alone or together with other parties connected to him within the meaning of Paragraph 1(2) of the Foreign Tax Act holds, either directly or indirectly, at least one tenth of the company’s initial or share capital;
  5. inventions, utility models and layout designs not covered by point 3 which are registered in a national book or register;
  6. economic assets not covered by points 1, 2 or 5 and which are at the disposal of a domestic industrial or commercial undertaking, in particular under a tenancy or lease;
  7. Mortgages, charges on land, rent charges and other debts or rights where these are secured, directly or indirectly, on domestic immovable property, on rights equivalent to domestic immovable property, or on vessels registered in a national shipping register. Loans and debts in respect of which part debentures have been issued are excluded;
  8. claims arising from participation in a commercial undertaking as a silent partner and from loans with profit participation, where the debtor’s domicile or habitual residence, registered office or central management is in Germany;
  9. Rights of enjoyment attached to one of the assets referred to at points 1 to 8.

Bank accounts with a German bank or a branch of a foreign bank in Germany are not subject to taxation because of situs.

The entire estate is not taxed. However, in this case, the taxpayer does not benefit from the full tax free amount. In some cases this may lead to a higher tax due than in case of unlimited tax liability. In order to avoid this, the beneficiary can chose that the application of the rules of unlimited taxation if either the decedent or the beneficiary resides in the EU or the EEA . If he chooses the application unlimited taxation of his acquisition, his whole acquisition, irrespective where the assets are situated, will be taxed in Germany. However, he will profit from the full tax allowance.

Tax exemptions and Reliefs of the German Inheritance Tax

The German Inheritance and Gift Tax Act provides for significant deductions.

Community property and other issues of the matrimonial property regime

In many jurisdictions the spouses acquire joint property during the marriage. In such cases, only the share of the first dying spouse is taxable under the German Inheritance Tax Act.

Under German law, there is generally no spousal community property unless the spouses agree to such an arrangement in a contractual agreement. However, the surviving spouse will receive one half of the surplus of the other spouse when marriage ends because one spouse dies (Community of accrued gains (Zugewinngemeinschaft)). As the surviving spouse has a right to the accrued gains and his claim is not subject to taxation . 

Exemption for family home

The family home of the surviving spouse (or registered same-sex partner) is completely tax exempt, if it is located in the EC or EEA. The family home must be personally used as principle home for another 10 years after death. If there are pressing reasons why the surviving spouse cannot use the family home for his or her own purposes (e.g., in the event that the acquirer requires health care), this tax-free status remains unaffected.

The tax exemption also applies if the family home is gifted to the spouse during the lifetime of the donor, provided that spouse uses the family home for his or her own purposes for a period of 10 years after the donation.

If children and stepchildren (or children of deceased children or stepchildren) inherit the family home, it is tax exempt, if the beneficiary uses the family home for his or her own purposes for a period of 10 years after the death of the deceased. If the living space exceeds 200 square meters, the portion exceeding 200 square meters is liable to tax.

Relief for Business Assets, Interests in a Partnership or Substantial Shareholding

Germany has enacted extensive tax exemptions for business assets, interests in a partnership or substantial Shareholding resident in Germany, in the EU or in the EEA (hereinafter: business assets). A basic business asset relief and an optional business asset relief are available.

Basic business asset relief

If the beneficiary chooses the basic tax relief, 85% of the business assets will be exempt from the tax base if:

  • The business is continued for a minimum of five years and
  • the direct wage costs during this period amount to 400 % of the average wage costs in the last five years before the tax accrues

There is an additional tax allowance for a transfer of business assets amounting to a maximum of EUR 150,000. Business property may only benefit from the basic relief if it does not contain more than 50% of passive non-operating assets. Non-operating assets are land, portions of land, land rights and buildings provided to third parties for use and shares of 25% or less in a subsidiary corporation.

Optional business asset relief

If the taxpayer chooses the optional relief, 100% of the business assets will be exempt from taxation, if:

  • The business is continued for a minimum of 7 years and
  • The direct wage costs during this period amount to 700 % of the average wage costs in the last 7 years before the dated of death

Business property may only benefit from the basic relief if it does not contain more than 10 per cent of passive non-operating assets.

Pension Plans

Payments from German (or foreign) government pension schemes are not taxable in Germany. Company based plans are generally subject to taxation under the German Inheritance Tax Act. However, the German Federal Financial High Court has ruled that certain payments from company pension plans are tax exempt. Specifically, payments are exempt if the underlying contractual agreement was made between a person and his employer and the claim of that person is a result of his work. This is not the case if the deceased was self-employed or if he is manager of a company he owns.

Other tax exemptions and tax relief

Other tax exemptions and tax relief of the German Inheritance and Gift Tax Act include:

  1. Household and personal effects are tax exempt up to EUR 41,000 if the beneficiary is taxable in tax class I (otherwise up to EUR 12,000)
  2. Movables (e.g. personal jewelry) are tax exempt up to € 12,000
  3. Real estate (including parts of real estate) is tax exempt, if there is a public interest in preservation and it is open to the public
  4. Art collections, collections of scientific interest and other cultural assets can, under certain conditions, be exempted from 60%, 85% or even 100% of the inheritance tax
  5. Gifts to churches recognized as such in Germany and to Jewish cultural communities in Germany
  6. Gifts to German charities
  7. Gifts to foreign churches and charities, if the foreign government grants similar tax exemptions to German churches/charities .

Estate debts and costs of administration

Estate debts (debts that have occurred before the date of death) can be deducted from the taxable estate. Generally, costs of the administration of the estate are not deductible. However, costs that are necessary to administer the estate (e.g. court fees) can be deducted. Costs that were necessary to fulfill the wishes of the testator can also be deducted. Thus, if the testator instructed the executor in his will to sell all estate assets and distribute cash to the beneficiaries, all costs of selling the assets can be deducted.

Valuation

Tax assessment is based on the fair market value (Gemeiner Wert) of the transferred asset at the time of the transfer (e.g. death).

Tax free allowances

General Tax free allowance

The general tax allowance depends on the familial relationship between deceased and beneficiary. In case of unlimited tax liability - the following tax free allowances apply:

Beneficiary is ...

Amount in EUR

the spouse of the deceased

500.000

divorced spouse

20 000

a registered same sex partner

500.000

a child of the deceased (including step-children)

400 000

a child of a predeceased child the deceased

400 000

an offspring of living children of the deceased

200 000

a parent or an other ascendant

100 000

a sibling (sister or brother) of the deceased

20 000

a niece and nephew of the deceased

20 000

a step-parent of the deceased

20 000

a parents-in-law of the deceased

20 000

a daughters-in-law or son-in-law of the deceased

20 000

an other person

20 000

Please note: The tax free exemption is only EUR 2,000 if both the testator and the heir are not resident in Germany and, thus, only estate assets situated in Germany are taxed (situs taxation), see § 16 (2) German Inheritance and Gift Tax Act. 

In the case Vera Mattner v. Finanzamt Velbert (Case C‑181/12) and the matter Yvon Welte v. Finanzamt Velbert (Case C‑181/12) the European Court of Justice (ECJ) ruled, that  § 16 (2) of the German Inheritance and Gift Tax Act violates European Law. 

Spousal tax free allowance

An additional tax free allowance of up to EUR 256,000 is granted to the surviving spouse; provided that the surviving spouse is not entitled to pension payments upon the death of the spouse which are not subject to German Inheritance tax (see above). If the surviving spouse is entitled to such pension payments, the allowance will be reduced by the net present value of such pension claims.

 

Special tax free allowance for children of the deceased

An additional allowance of up to EUR 52,000 is granted to children of the deceased up to the age of 27 provided that such children are not entitled to pension payments upon the death of their parent. If so, the allowance will be reduced by the net present value of such pension claims.

"Per Transfer"

 

The tax free amount under § 16 and 17 German Inheritance and Gift Tax Act is granted for any “transfer” from the same person. Thus, a person may profit more than one time from the tax free amount. 

Example: An individual dies in 2010 and names his surviving spouse, S, sole heir. However, he gives to each of these 3 children, K 1, K 2 and K 3, € 400,000 tax free. 2013 S dies and gives to K 1, K 2 and K 3 € 400,000.

Transfers from the same person within 10 years are added to the calculation basis of the German inheritance tax .

Example: If A had made a donation to his children in 2005, such donation would have been added to the transfer on death and, thus, the tax free amount would be exceeded.

This can be used to minimize the applicable tax.

Example:
If A had made the donation in 1999, he could have used the exemption of € 400.000,-- twice.

Tax Rates

The tax rates depend on the tax class and the taxable transfer. 

Determination of the Tax Rate

The tax rate of the German inheritance tax depends on the tax class of the beneficiary.

Tax Classes

The tax class depends on the family relation between the deceased and the beneficiary:

Beneficiary is ...

Tax class

the spouse of the deceased

I

the divorced spouse

II

the registered same sex partner

I

a child of the deceased (including step-children)

I

a child of a predeceased child the deceased

I

an offspring of a living child of the deceased

I

a parent or other ascendant (acquistions moris causae)

I

a sibling (brother or sister) of the deceased

II

a nices or nephew of the deceased

II

a step-parent

II

a parents-in-law

II

a daughter-in-law or son-in-law

II

any other person

III

 The tax rate in each tax class can be taken from the following table:
  

Taxable acquisition (§ 10)


up to… EUR

Tax rate in every tax class in %

I

II

III

75 000

7

15

30

300 000

11

20

30

600 000

15

25

30

6 000 000

19

30

30

13 000 000

23

35

50

26 000 000

27

40

50

More than 26 000 000

30

43

50

Deduction of Foreign Estate Taxes and Inheritance taxes

Upon application a foreign tax will be offset against the German inheritance tax if:

  • either the deceased or the beneficiary was a German taxpayer
  • estate assets are located outside of Germany which is taxable in Germany and abroad,
  • the foreign tax is comparable to the German inheritance tax,
  • the foreign tax was assessed and paid,
  • The foreign tax accrued within the last 5 years prior to the German tax.

Estate taxes (e.g. US federal Estate tax) are generally comparable to the German inheritance tax. The Canadian Capital Gains tax on deemed disposition on death and similar taxes (e.g. Thai Capital Gains tax) cannot be offset against the German inheritance tax . However, it can be deducted as estate debt or as expenses of administration of the estate. If unlimited tax liability in Germany derives from the fact that the deceased had a residence in Germany the foreign tax on foreign bank accounts cannot be offset against the German Tax. This does not violate European law.

Personal Tax Liability under the German Inheritance and Gift Tax Act

The beneficiary must pay the German inheritance tax. However, the Executor is obliged to make sure that the inheritance tax is paid.  Failure to comply with this obligation may result in personal liability for the Executor. The Executor has the right to withhold the funds necessary to pay the German inheritance tax and pay the tax directly out of the Estate without the consent of the beneficiaries.

Future Development of the German Inheritance Tax

The Federal German Financial High Court (decision of 27. September 2012, file number II R 9/11) has expressed its doubts concerning the constitutionality of the German Inheritance and Gift Tax Act and has requested the German constitutional court (Bundesverfassungsgericht, BVerfG) to give a ruling on the constitutionality of the Inheritance and Gift Tax Act. It is anticipated that the BVerfG will hold, that the German Inheritance tax violates German constitution and will ask the German Legislator to change the law within a certain time frame. Thus, these prospective changes to the German inheritance Act should be taken into consideration.

German Inheritance Tax Return

There is no obligation to file an inheritance tax return unless the German tax authorities demand it.

However, according to § 30 German Inheritance and Gift Tax Act, the beneficiaries (and - if there is an executor - the executor) are obliged to inform the German tax authorities within three month of any acquisition (duty of disclosure). If they fail to do so and as a consequence German inheritance taxes are not or not sufficiently paid, they may be prosecuted for tax fraud.

German banks, insurance companies and other financial institutions inform the German tax authorities of any estate assets held by them upon receipt of notice of the death of their client. German notaries, consuls and probate courts inform the German tax authorities of all documents that may impact the taxation of the Estate.

On the basis of the information received from the beneficiaries and from other sources (e.g. banks), the German tax authorities determine if German inheritance tax may be due and - if this is the case - ask to file an inheritance tax return (“Erbschaftsteuerklärungen“). 

Generally, the inheritance tax return must be filed by the heirs for their respective share of the estate. However, if there is an executor, the executor must file the inheritance tax return. Foreign executors are liable to file German inheritance tax returns if they qualify for a German certificate of executorship and have filed an application for a German certificate of executorship. 

Generally there is no German Estate Income Tax Return, as - under German law - an estate is not a separate legal entity for tax purposes. However, if there is a community of co-heirs, income from assets administered by the community-of-co-heirs must be assessed each year (“Erklärung zur gesonderten und einheitlichen Feststellung der Grundlagen für die Einkommensbesteuerung“, or abbreviated: “Feststellungserklärungen“).

If all or one of the beneficiaries reside outside of Germany, German banks and other financial institutions are liable for the payment of inheritance tax by such beneficiaries. Thus, they make no payments to beneficiaries residing outside of Germany, unless a tax clearance certificate (Unbedenklichkeitsbescheinigung) is provided.

Jan-Hendrik Frank
04.05.2013


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