German Inheritance Tax

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.

Applicable Tax Laws

The taxation of estates in Germany is codified in the German Inheritance and Gift Tax Act (ErbSt). Additionally, other German tax laws, such as the German General Fiscal Code (AO) and the Valuation Act (BewG).

Please note: Germany has tax treaties with the USA (Germany-U.S. Estate and Gift Tax Treaty), Greece, France, Sweden, Denmark and Switzerland, that may override German domestic law. 

General Concept of the German Inheritance Tax

Germany does not levy an estate tax (Nachlasssteuer) but an inheritance tax (Erbschaftsteuer). In contrast to an estate tax, an inheritance tax does not attach to the estate itself but instead is imposed on the acquisition (Erwerb) of the beneficiary. See § 1 ErbStG. Accordingly, the beneficiary must pay the German inheritance taxes on all transfers received. See § 20 ErbStG.

Germany has a unified inheritance and gift tax systems: Transfers upon death or inter vivos between the same persons within 10 years are aggregated and the tax is (re-) calculated based on the aggregated taxable acquisition. See § 14 ErbStG

Example: A makes a lifetime gift to his sole child in 2010 and dies in 2019 leaving his estate to his child, the value of both transfers is aggregated in order to calculate the tax. 

This can be used to minimize the applicable tax.

Example: If A had made the gift in 1999, he could have used the tax-free exemption twice and the (progressive) tax rate may be lower. 

Taxable Transfers of Property on Death

German inheritance tax is imposed on any transfer of property at death. For example, tas is imposed on the following transfers:

German and Foreign Pension Plans

Payments from German (or foreign) government pension schemes are excluded from taxation in Germany. Company based pension plans or tax qualified annuities are generally subject to taxation under the German Inheritance Tax Act. However, the German Federal Fiscal Court (Bundesfinanzhof) held that certain payments from tax qualified company pension plans or annuities are exempt from German inheritance tax. Payments from foreign pension plans are tax exempt, if the foreign pension plan resembles a German tax qualified pension plan or annuity. Nevertheless, it should be noted that German pension plans are somewhat unique and foreign plans often do not resemble German plans. 

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 and Gift Tax Act.

Under the German laws governing matrimonial property (if applicable), there is no spousal community property unless the spouses agree to such an arrangement in a contractual agreement (antenuptial agreement, postnuptial agreement). However, in default of such an agreement, the surviving spouse will receive equalization of accrued gains (Zugewinnausgleich) when the marriage ends, e.g. because one spouse dies. The value of the equalization claim is tax exempt. See § 5 ErbStG  

Taxation of Residents

Pursuant to § 2(1) ErbStG (unlimited tax liability) Germany taxes all worldwide transfers, if either the deceased at the time of his death or the beneficiary - at the time of the acquisition -  is a German tax resident (Inländer) of Germany.

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 neither the deceased nor the beneficiary is a resident or deemed resident under § 2 ErbStG, the beneficiary will generally only be subject to German Inheritance Tax based on German situs property (Inlandsvermögen). Such German domestic property (Inlandsvermögen) includes the following:

  1. domestic agricultural and forestry assets;
  2. domestic real estate;
  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 corporation, where the company’s registered office or central place of 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 Transaction Tax Act (Außensteuergesetz) holds, either directly or indirectly, at least 10 % 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.

Important: Most (private) financial investments (e.g. cash in account, exchange-traded funds, stocks, bonds) in Germany are not subject to taxation because of situs. However, the financial institution will only release such assets after it has received a tax clearance certificate (steuerliche Unbedenklichkeitsbescheinigung)

Tax Exemptions and Reliefs of the German Inheritance Tax

The German Inheritance and Gift Tax Act provides for significant exemptions (sachliche Steuerbefreiungen) and reliefs. 

Exemption for the Family Home

The family home (Familienheim) of the surviving 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 surviving spouse personally uses it as principle home for another 10 years after death. See § 13(1) Nr. 4 b ErbStG

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.

Estate planning consideration: The tax exemption also applies if the family home is gifted to the spouse during the lifetime of the donor. In this case their is no requirement to live in it for 10 years after the donation. Therefore, it may be advisable to gift the family home during lifetime. 

If children and/or stepchildren (or children of deceased children or stepchildren) inherit the family home, it is tax exempt, if the beneficiary uses the family home as such 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.

Exemptions and Reliefs for Agricultural, Forestry or Business Assets

Germany has enacted extensive tax exemptions and reliefs for agricultural, forestry or business assets, interests in a partnership or substantial shareholdings resident in Germany, in the EU or in the EEA.

Other Tax Exemptions and Tax Relief

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

  • 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);
  • Movables (e.g. personal jewelry) are tax exempt up to EUR 12,000;
  • 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;
  • Art collections, collections of scientific interest and other cultural assets can, under certain conditions, be exempted from 60%, 85% or even 100% of the German inheritance tax;
  • Acquisition by a church (Kirche) and a Jewish cultural community in Germany;
  • Aquisition by a corporation, association or pool of assets pursuing a ecclesiastical purposes (kirchlichen Zwecke), public-benefit purposes (gemeinnützige Zwecke) or a benevolant purposes (mildtätige Zwecke),
  • Aquisitions by a foreign corporation, association or pool of assets pursuing ecclesiastical purposes (kirchliche Zwecke), public-benefit purposes (mildtätigte Zwecke) or a benevolant purposes (mildtätige Zwecke), whose German source income would be tax privileged in Germany; if the tax-privileged purposes are only realised abroad, the tax exemption is only granted if individual residing in Germany are supported or the activities contribute to the reputation of the Federal Republic of Germany; and
  • Acquisition by German political parties. 

Deductible Estate Debts and Costs of Administration

The following obligations imposed on the taxpayer (beneficiary) are deductible: 

  • Debts of the decedent (e.g. nursing home/hospice costs, guardianship expenses);
  • The value of a legacy (Vermächtnis), testamentary burden (Auflage) or forced share (Pflichtteil) to be paid by the taxpayer;
  • The costs of the burial, an appropriate grave headstone, the usual grave maintenance with its capital value for an undetermined length of time; and
  • The costs arising for the recipient as a direct result of handling and distributing the estate.

Generally, such costs must be proven by filing support (e.g. invoices) together with the inheritance tax return. However, a standard deduction is provided in the amount of EUR 10,300 without any support.  

Naintenance costs (e.g. electricity) and the costs for selling estate assets (e.g. real estate agent`s commission) are generally not deductible. However, 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.

In cross-border estate matters, it is also arguable that a beneficiary who lives abroad and therefore cannot use the inherited property unless it is liquidated, can deduct the costs of selling such assets. 

Valuation

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

Personal Tax-free Exemptions

Certain persons can deduct a certain amount from their taxable acquisition, to which is referred hereinafter as tax-free exemption (Freibetrag) or inheritance tax threshold. There are three types personal tax-free exemptions:

Personal Tax-free Exemption

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

Beneficiary is ...

Exemption 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 of the deceased

400,000

a child of living children of the deceased

200,000

other offspring of a living child of the deceased

100,000

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

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

Prior to June 2017, the tax-free exemption under § 16(2) ErbStG was limited to EUR 2,000 in case of non-resident 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 newly enacted 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, but be subject to a reduction which is calculated as follows: 

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

Divided by: All estate assets and 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 EUR 400,000. The value of her worldwide estate is determined to be EUR 1 million. The decedent gives everything to her son. Germany taxes only the value of the apartment. However, the tax-free amount of EUR 400,000 under § 16(1) ErbStG is not granted in full. Instead, it is reduced by EUR 240,000 under § 16(2) ErbStG: Tax-free exemption minus EUR 600,000 (estate assets not subject to German situs taxation) ./. EUR 1 million (all transfers in a 10-year period) × EUR 400,000 (tax free allowance) = EUR 240,000. Thus, the tax-free exemption under § 16(2) ErbStG is limited to EUR 160.000. 

Special Spousal Tax-free Exemption

An additional tax-free exemption of up to EUR 256,000 is granted under § 17 ErbStG (Vorsorgefreibetrag) to the surviving spouse, if the surviving spouse is not entitled to tax-free pension payments upon the death of the spouse. If the surviving spouse is entitled to such pension payments, the tax-free exemption will be reduced by the net present value of such pension claims.

Special Tax-free Exemption for Children of the Deceased

An additional tax-free exemtion 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 tax-free pension payments upon the death of their parent (§ 17 ErbStG). If they are entitled to such benefits, the exemption will be reduced by the net present value of such pension benefits.

Tax-free Exemption for the Equalization of surplus Claim

The value of the claim for equalization of accrued gains (Zugewinnausgleich) is tax exempt. See § 5 ErbStG.  

"Per Transfer"

The tax-free exemption under § 16 ErbStG and § 17 ErbStG is granted for any “transfer” from the same person. Thus, it is favorable to make dispositions to more than one person. 

Example: A has a net worth of EUR 1,3 Mio. If he leaves everything to his wife, his wife must pay Geran inheritance tax on an amount of EUR 800,000 a rate of 19 %. However, if he would give to each of his 2 children EUR 400,000 and the remainder, EUR 500,000 to his wife, no beneficiary would pay any German inheritance tax. 

Inheritance Tax Classes and Rates

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

Inheritance Tax Classes

The tax class depends on the familial relationship 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 nieces 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

Inheritance Tax Rates

The German inheritance tax rates (2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019) 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 resident of Germany in the meaning of § 2 ErbStG,
  • estate assets are located outside of Germany, which are 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. See § 21 ErbStG

Estate taxes (e.g. UK inheritance tax or South African estate duty) are generally comparable to the German inheritance taxes and, thus, qualfy for unilateral relief (Anrechnung) in Germany.

The Canadian capital cains tax on deemed disposition on death and similar taxes (e.g. Thai Capital Gains tax) are not comparable to the German inheritance tax and therefore cannot be offset against the German inheritance tax. However, such taxes can be deducted as estate debt or as expenses of administration of the estate.

If unlimited tax liability (unbeschränkte Steuerpflicht) in Germany is derivative of the fact that the deceased had a residence in Germany, the foreign tax on personal property (e.g. a yacht, classic cars, artwork) and nontangible property (e.g. balance of foreign bank account, shares in corporation) cannot be offset against the German Inheritance Tax. The  European Court of Justice has ruled, that this rule does not violate European law.

Personal Tax Liability under the German Inheritance and Gift Tax Act

The beneficiary must pay the German inheritance tax. See § 20 ErbStG. However, the executor (Testamentsvollstrecker) 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.

German Inheritance Tax Return and Duty of Disclosure

There is no obligation to file a German inheritance tax return (Erbschaftsteuererklärung) unless an inheritance tax office demands it. However, according to § 30 ErbStG, the beneficiaries are obliged to report the transfer to the local inheritance tax office within 3 months after gaining knowledge of the itaxable transfer of property at death in the meaning of § 1 ErbStG.

Please note: The 3-month period even applies if the estate is administered by a (foreign) personal representative and such person hasn´t made a distribution yet. 

If the beneficiary fails to comply with this duty of disclosure 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, the financial institutions and other sources (e.g. German notaries, German probate courts or German Consuls), 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 from any person involved in the transfer. The filing period time is generally one month. Upon application, an extension of the filing period is granted in most cases. 

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. 

The tax becomes due upon receipt of the tax assessment (Erbschaftsteuerbescheid) by the person who has filed the tax return (e.g. executor or beneficiary). Generally, the assessed tax is due within one month after receipt of the tax assessment. 

Please note: As the tax is triggered by the death of the decedent, the tax may due on the value of the total acquisition  even though the personal representative hasn`t distributed the estate yet. If the taxpayer is unable to pay the amount, the German tax authorities may, upon application, extend the payment period, however, late payment interest of up to 6 % per year may be payable. 

Tax Clearance / Transfer Certificate

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 transfer / tax clearance certificate (Unbedenklichkeitsbescheinigung) is provided. Such tax clearance certificate will be issued by the tax authority once it has determined that no tax is due or the assessed tax has been fully paid. 

Estate Income Tax Return

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 (Erbengemeinschaft), 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).

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