ECJ Rules that the German Inheritance Tax Act Violates European Law

ECJ Rules that the German Inheritance Tax Act Violates European Law

This summer we reported on the Advocate General’s opinion on the matter Yvon Welte v. Finanzamt Velbert. The matter concerns the question as to whether Articles 56 [EC] and 58 [EC] should be interpreted as precluding German national legislation on inheritance tax under which, in cases where land within that Member State is acquired through inheritance by a non-resident person, that person is entitled to a tax-free amount of only €2.000, whereas a tax-free amount of €500.000 would apply if, at the time of the inheritance, the deceased person or the acquirer had a permanent residence in that Member State. The ECJ ruled on October 17, 2013 that Germany’s inheritance tax is precluded by Articles 56 [EC] and 58 [EC]. 

 The case Yvon Welte v. Finanzamt Velbert concerns the estate of a Swiss national and resident comprising of real property located in Germany and certain bank accounts in Germany and Switzerland. The decedent’s wife, who was born in Germany but acquired Swiss nationality and residence upon her marriage to the decedent, was the sole heir of the decedent’s estate. The real property, which represented 62% of the total value of the estate, received a €2.000 deduction while the other components of the estate were not taxed. Should the decedent and/or his wife been residents of a Member State they would have been entitled to an allowance of €500.000 under German domestic law. The heir lodged a complaint which was heard by the German Finanzgericht (Finance Court). Upon hearing the case, the Finanzgericht stayed their decision pending clarification from the ECJ. The Finanzgericht submitted the matter to the ECJ based on the question as to whether the unequal treatment of resident and non-resident payers of inheritance tax is incompatible with the free movement of capital guaranteed by the EC Treaty.
 The threshold question faced by the ECJ was whether a law concerning inheritances should be characterized as a “restriction on capital” under Article 56 [EC]. The Court determined that the German inheritance tax had the effect of reducing the value of the inheritance of a resident of a State other than the State in which the assets concerned were situated and which taxed the inheritance of those assets and was therefore a restriction on the free movement of capital. In sum, the ECJ held that Germany’s national legislation constituted a restriction on the free movement of capital within the meaning of Articles 56(1) [EC].

 With respect to Article 58 [EC], the question before the Court was whether there existed a sufficient justification for Germany’s inheritance tax that restricted the free movement of capital.  The Court examined the distinction between different treatment permitted under Article 58 [EC] and arbitrary discrimination prohibited under Article 58. In doing so, the Court analyzed Germany’s various justifications including public interest and the coherence of the German tax system. Ultimately, the Court held that there was no objective justification for Germany’s unequal tax treatment restricting the free movement of capital.

 On the grounds discussed above, the Court ruled that Articles 56 [EC] and 58 [EC] preclude legislation of a Member State relating to the calculation of inheritance tax which provides that, in the event of inheritance of immovable property in that State, in a case where the deceased and the heir had a permanent residence in a third country at the time of death, the tax free allowance which would have been applied if at least one of them had been resident in that Member State at that time.
The ECJ’s ruling has significant ramifications for estates and heirs in which the decedent and/or heir reside outside the Member States. For residents of Switzerland, U.S., Canada and others, the tax savings could be immense and we encourage those with questions regarding such issues to contact our office.

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