The German Federal Fiscal Court (BFH) ruled on September 20th 2022 (file number: II B 2/22, NV) that the Germany-U.S. Estate and Gift Tax Treaty does not prevent Germany from imposing German inheritance tax (Erbschaftsteuer) on a U.S. citizen beneficiary who is a German tax resident (Inländer) for not more than ten years. The Court argued that the language of Art. 4 para. 3 of the Treaty (fiscal domicile) does not allow an interpretation that the 10-year rule also applies to the beneficiary as reference to the "death" of the person is made.
Comment
Prior to the Court’s decision the issue was subject to varying interpretations. The decision clarifies the issue as to whether the Treaty prevents Germany from taxing the inheritance of a U.S. citizen in the first 10 years of his stay in Germany. It has not yet been decided whether this also applies to the imposition of German gift tax (Schenkungsteuer), e.g. on the value of a lifetime transfer (gift) or distribution from foreign pool of assets with the purpose to bind assets (Vermögensmasse ausländischen Rechts, deren Zweck auf die Bindung von Vermögen gerichtet ist). Although gifts and inheritances are treated equally in principle, in the case of gifts it is difficult to argue that the wording of Art. 4 para. 3 of the Treaty excludes an interpretation to the effect that the 10-year rule also applies to the donee. However, the tax authorities have already positioned themselves in this direction. Against this background, it is particularly important for U.S. citizens who are temporarily residing in Germany and expect an inheritance from the USA to seek advice on the tax planning options.