German Gift Tax

German Gift Tax

Applicable Tax Laws

The taxation of gifts in Germany is codified in the Inheritance and Gift Tax Act (Erbschafts- und Schenkungsteuergesetz) - hereinafter ErbSt. Additionally, other German tax laws, such as the German General Fiscal Code (Abgabenordnung) - hereinafter AO - and the Valuation Act (Bewertungsgesetz)- hereinafter BewG apply. 

Please note: Germany has ratified tax treaties with the USA (Germany-U.S. Estate and Gift Tax Treaty), Greece, France, Sweden, Denmark and Switzerland, that may affect Germany`s taxation of a gift. 

Taxable Lifetime Gifts

Pursuant to § 7(1) ErbStG the following transfers are regarded as lifetime gifts:

  1. any gratuitous benefit among living persons, insofar as it enriches the recipient at the expense of the person making the benefit, in particular a gift (Schenkung)
  2. value received without corresponding consideration as a result of the fulfilment of a condition imposed by the donor or as a result of the fulfilment of a condition attached to a legal transaction while alive.
  3. which is received by a person who, upon approval of a gift, receives benefits ordered to other persons or voluntarily accepted for the purpose of obtaining approval;
  4. the enrichment which a spouse or a registered same-sex partner (eingetragener Lebenspartner) experiences upon agreement of the community of property (Gütergemeinschaft);
  5. what is granted as compensation for a waiver of rights over future inheritance (Erbverzicht);
  6. (omitted)
  7. what a preliminary heir (Vorerbe) gives to the subsequent heir (Nacherbe) in consideration of the ordered subsequent inheritance prior to its occurrence;
  8. the transfer of assets on the basis of a foundation transaction among the living.
  9. what is acquired upon the dissolution of a foundation (Stiftung);
  10. a lifetime transfer to a foreign pool of assets (Vermögensmasse ausländischen Rechts), the purpose of which is to bind assets;
  11. distributions from a foreign pool of assets the purpose of which is to bind assets, during to the existence of such pool of assets or upon its termination.
  12. which is granted as severance pay for claims acquired by way of postponement, age or limited term, unless it is a case under § 3(2) ErbStG, before the time of the occurrence of the condition or event.

Taxation of Residents

Pursuant to § 2(1) ErbStG (unlimited tax liability) Germany taxes all gifts, if either the donor (Schenker) or the donee (Beschenkter) is a German tax resident (Inländer) of Germany at the time of the taxable acquisition. An individual is a German (deemed) tax resident if:

A corporation, a partnership, an association and/or a foreign pool of assets (Vermögensmasse ausländischen Rechts) is a German tax resident, if its registered office (Sitz) or place of effective management (Ort der Geschäftsleitung) is situated in Germany. 

Non-Resident Taxation

If the donor and the donee are not residents or deemed residents under § 2 ErbStG, generally only German domestic property (Inlandsvermögen) is subject to German gift tax (beschränkte Steuerpflicht). Cash in account or privately held stocks are generally not German domestic property.

Valuation

While there are some special valuation rules for certain asset classes (e.g. real estate), tax assessment is based on the fair market value (Verkehrswert) of the transferred asset at the time of the effective date of the gift.

The value of a usufruct (Nießbrauch), a habitation right (Wohnrecht) or a foreign equivalent (e.g. life estate) can be deducted from the value of the property which is subject to such rights. 

As value of the usufruct can be deducted from the value of the gift and the death of the donor does not trigger any inheritance tax on the expired life estate, a gift with a retained life estate is a popular estate planning technique in Germany. 

Tax Exemptions

The German Inheritance and Gift Tax Act provides for significant exemptions with regard to specific assets (sachliche Steuerbefreiungen): 

Exemption for the Family Home

The transfer of the family home (Familienheim) to the spouse (or registered same-sex partner) is completely tax exempt, if

  • it is located in the European Union (EU) or European Economic Area (EAA); and
  • the spouse personally use it as principle home. See § 13(1) Nr. 4 a ErbStG

Appropriate occasional gifts (übliche Gelegenheitsgeschenke)

Gifts (Schenkungen) that were made at a certain occasion (e.g. wedding, birthday, anniversary) and are "appropriate" to this occasion are exempt from the German gift tax. 

Personal Tax-free Allowance

The personal tax-free exemption depends on the familial relationship between donor and the donee. In case of unlimited tax liability - the following tax-free allowance applies (see § 15 ErbStG and § 16 ErbStG):

Relationship do donor

Tax-free allowance

Spouse or a registered same-sex partner (Lebenspartner)

€ 500,000

Child (including stepchild, adopted child or child born out of wedlock)

€ 400,000

Child of a living child

€ 200,000

Child of a predeceased child

€ 400,000

Remoter offspring

€ 100,000

Parent or remoter ascendant

€ 20,000

Sibling (brother/sister)

€ 20,000

Nieces/nephews

€ 20,000

step-parents

€ 20,000

Parent-in-law (parents by marriage)

€ 20,000

divorced spouse

€ 20,000

All other persons (including corporations, however, see special rules for trust)

€ 20,000

Personal Tax-free Exemption in Case of Non-Resident Taxation

Prior to June 2017, the tax-free allowance under § 16(2) ErbStG was limited to €2,000 in matters involving situs taxation. The European Court of Justice has since ruled in the cases Vera Mattner v. Finanzamt Velbert (Case C‑510/08) and Yvon Welte v. Finanzamt Velbert (Case C‑181/12)  that this reduced tax-free allowance violates European Law and that the full exemption amount under § 16(1) ErbStG must be granted. In response to aforementioned rulings, § 16(2) ErbStG was reformed. The new law became applicable on June 25, 2017 and holds that the personal tax free allowance under § 16(1) ErbStG shall also be granted in cases of situs taxation, however, it is reduced by a partial amount which is calculated as follows:

All estate assets and gifts within a 10-year period not subject to German situs taxation

÷ all gifts in a 10-year period.

Example: The decedent’s fiscal domicile at the time of death was Los Angeles, CA USA. At the time of her death, the decedent owned an apartment in Munich with a value of €400,000. The value of her worldwide estate is determined to €1 million. The decedent gives everything to her son. Germany taxes only the value of the apartment. However, the tax-free amount of €400,000 under § 16(1) ErbStG is not granted in full. Instead, it is reduced by €240,000 under § 16(2) ErbStG:

Tax free allowance minus €600,000 (estate assets not subject to German situs taxation)

÷ €1 million (all transfers in a 10-year period)

× €400,000 (tax free allowance)

= €240,000

Thus, the tax-free allowance under § 16(2) is limited to €160.000.

The newly enacted law does not explicitly state how the 10-year period shall be calculated. The stated purpose of the law was “to ensure that taxation cannot be circumvented by spreading out payments split into several parts between the same persons and deducting only a pro rata allowance, earlier acquisitions made by the same person within 10 years have to be included in the calculation of the pro rata allowance.” It is arguable, that not only gifts prior to the taxable event are counted, but also thereafter. However, as § 16(2), sentence 2 ErbStG states that “Any earlier acquisitions must be recognized at their earlier value”, we opine that the newly enacted law must be interpreted in a way that only prior gifts are considered. Accordingly, it is generally advisable to transfer German situs asset prior to assets abroad.

Example: In the above example the decedent gifted his son prior to the apartment non-German situs assets (e.g. balance of a bank account in Germany). This will further reduce the available tax exemption amount at the time of gifting the apartment and it would be lower than €160,000. If he had made the gift after the transfer of the apartment, the pro-rata exemption amount would still be available.

Furthermore, it may be favorable to make gifts every 10 years with a value of up to €400,000 as such gifts would not be aggregated.

Gift Tax Rates and Gift Tax Classes

The German gift tax rates depend on the tax class and the value of the taxable acquisition of the beneficiary.

Gift Tax Classes

The tax class depends on the familial relationship between the deceased and the beneficiary:

 

Relationship do donor

Tax Class

Spouse or a registered same sex partner (Lebenspartner)

I

Child (including stepchild, adopted child or child born out of wedlock)

I

Child of a living child

I

Child of a predeceased child

I

Remoter offspring

I

Parent or remoter ascendant

II

Sibling (brother/sister)

II

Nieces/nephews

II

step-parents

II

Parent-in-law (parents by marriage)

 

divorced spouse

II

All other persons (including corporations, however, see special rules for trust)

III

Gift Tax Rates

The German gift tax rates (2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020 and 2021) in each tax class can be taken from the following table:

Value of the taxable acquisition (§ 10) is

Tax Class I

Tax Class II

Tax Class III

Up €75,000

7%

15%

30%

€75,000–€300,000

11%

20%

30%

€300,000–€600,000

15%

25%

30%

€600,000–€6,000,000

19%

30%

30%

€6,000,000–€13,000,000

23%

35%

50%

€13,000,000–€26,000,000

27%

40%

50%

More than €26,000,000

30%

43%

50 %

Taxable Acquisitions within 10 years are aggregated

Lifetime gifts and transfers subject to inheritance tax from the same persons within 10 years are aggregated. The aggregation is carried out in such a way that the previous acquisitions within the ten-year period are added to the last taxable acquisition and the paid gift tax is deducted from the gift tax on the last gift. See § 14 ErbStG

Example: A gives his son €600,000 in 2010. As the value of the gift exceeds the tax-free exemption, gift tax in the amount of €22,000 is due pusuant to the following calculation:

Aggregate of gifts in the last 10 year: €600,000

Deduct Tax-free exemption (€400,000) = taxable acquisition: €200,000

Apply tax rate (11 %) = tax due: €22,000

2015 A gives his son another € 600,000. The gift tax is € 130,000 pursuant to the following calculation:

Aggregate of gifts in the last 10 year: €1.2 Mio. 

Deduct Tax-free exemption (€400,000) = taxable acquisiton: €800,000

Apply tax rate (19 %) = tax due: €152,000

Deduct paid gift for gifts in the last 10 years (- EUR 22,000) = gift tax payble: €130,000

Personal Tax Liability 

The donor and the donee are liable for the German gift tax (Schenkungsteuer). See § 20 ErbStG. In case of a foreign pool of assests (Vermögensmasse) the foreign pool of assets/its representative (= trustee) is liable for the gift tax too. 

German Gift Tax Return and Duty of Disclosure

There is no obligation to file a German gift tax return (Schenkungsteuererklärung) unless a tax office demands it. However, according to § 30 ErbStG, the beneficiaries are obliged to report the transfer to the local gift tax office within 3 months after gaining knowledge of the gift. If the beneficiary fails to comply with this duty of disclosure and, as a consequence, German gift taxes are not or not sufficiently paid, they may be prosecuted for tax fraud.

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