Decisions of European Court of Justice on Inheritance Tax

Decisions of European Court of Justice on Inheritance Tax

There are very few double taxation agreements in the field of inheritance and gift tax and national laws often discriminate non-residents or other nationals. As the European Court of Justice (ECJ) considers inheritances, legacies, gifts and foundations as a capital transfer in the meaning of Art. 56 (Freedom to transfer capital), the ECJ had to decide on several cases on inheritance a gift tax in the last years:

In the case van Hilden – van der Heijden (ECJ 23/02/2006 – C – 513/03) the ECJ held, that provisions of the Dutch inheritance tax Act stating, that a Dutch citizen remains liable to Dutch inheritance tax for a period of 10 years after leaving the Netherlands does not violate the EC treaty.

In the case Jäger (ECJ 17/01/2008 – C 256/06) the ECJ decided, that German law, that imposes different regulations on the valuation of domestic and foreign property (real estate) violates the EC Treaty. Germany has changed these regulations in 2008 and now applies the same regulations on the valuation of domestic and foreign property for all taxpayers.

In the case Arens-Sikken (ECJ 11/09/2008 – C – 43/07) the ECJ held, that it is not in line with EC law if the Netherlands do not allow a deduction of compensation payments to other heirs as estate debt if the deduction is disallowed only for non-residents.

In the case Block (ECJ 12/02/2009 – 67/08) the court held, that double taxation as a result of not harmonized national laws does not violate the EC Treaty. 
In the case Mattner (ECJ 22/04/2010 – C – 510/08) the ECJ held, that the reduced tax free amount of only EUR 2,000 according to § 16 (2) of the German inheritance tax act in case of limited tax liability, violates the EC Treaty. 

In the case Scheumann (ECJ 19/07/2012 – C -  31/11) the ECJ ruled, that  Legislation of a Member State for the purposes of calculating inheritance tax, excludes the application of certain tax advantages to an estate in the form of a shareholding in a capital company established in a third country, while conferring those advantages in the event of the inheritance of such a shareholding when the registered office of the company is in a Member State, primarily affects the exercise of the freedom of establishment for the purposes of Article 49 TFEU et seq., since that holding enables the shareholder to exert a definite influence over the decisions of that company and to determine its activities. The court argued, that those Treaty provisions are not intended to apply to a situation concerning a shareholding held in a company which has its registered office in a third country.

As these decisions show, the ECJ is verifying a violation of Art. 56 always in three steps:

  1. Did the transfer of capital take place?
  2. Was there a restriction of a free transfer of capital?
  3. Is there a justification for a restriction imposed by a member state?

Restrictions on the movement of capital include, in particular, those which are likely to deter non-residents from making investments in a Member State and those whose effect is to reduce the value of the inheritance of a resident of a State – including, therefore, a third country – other than the Member State in which the assets concerned are situated and which taxes the inheritance of those assets (Hilten-van der Heijden, paragraph 44; Block, paragraph 24).

Purely domestic situations cannot restrict the movement of capital. A situation in which a person who is resident in a Member State at the time of his death leaves to his heir, also resident in that Member State, immovable property situated in another Member State is by no means purely domestic. The same is true, if the testator has bequeathed to his sole heir 100% of the shares in a capital company with its registered office in a third country. Moreover, heirs to shares in a company based in a third country fall in principle within the scope of the free movement of capital (Scheumann (ECJ 19/07/2012 – C -  31/11)).

A justification for a restriction imposed by member state can be the consistency of tax systems, measures against tax fraud and tax evasion or the efficiency of tax collection.

In the currently pending Case Yvon Welte (C-181/12) the German Government argues that the legislation at issue is consistent both with the maintenance of fiscal cohesion and with the need to ensure the effectiveness of fiscal supervision. The German Government reasons that, whereas under the rules on limited tax liability, the advantage of a lower basis of assessment is offset by the disadvantage of a lower allowance, under the rules on unlimited tax liability, the advantage of a higher allowance is offset by the disadvantage of a higher basis of assessment. With regard to Mattner the German Government argues, that the facts giving rise to that judgment were not the same, since, in the case of a transfer by gift which, as a general rule, involves only a single asset, the differences between the rules on limited tax liability and unlimited tax liability are not apparent.

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