German Inheritance Tax: ECJ judgment on double (inheritance) taxation

On 12 February 2009, the European Court of Justice (ECJ) held that the free movement of capital does not require a Member State (MS) to credit foreign inheritance tax levied by another MS on a claim due from a foreign bank against domestic inheritance tax payable on that claim.

Ms Block, who is a German resident taxpayer, inherited from her mother, who had also been resident in Germany, assets located partly in Germany and partly in Spain. She was charged Spanish inheritance tax on the capital invested with a certain number of banks in Spain by both the Spanish. Germany had taxed the entire inheritance, including this capital, on the grounds that the deceased was resident in Germany (as too was the heir), whereas Spain based its right to impose tax specifically on this capital on the residence of the depository banks which were the debtors of the amounts in question. Mrs. Block's request to have the Spanish inheritance tax credited on the German inheritance tax payable was denied with respect to German inheritance tax legislation. According to these rules, a foreign tax credit is not available for assets which, as deposits in foreign banks, are deemed domestic.

The German Federal Finance Court (Bundesfinanzhof) asked the ECJ whether the German legislation in question is consistent with Community law and in particular with the rules relating to the free movement of capital.

The ECJ found that the inheritance of a claim against a foreign bank between two nationals of the same member state falls under Art. 56(1) EC (free movement of capital). The ECJ denied, however, a restriction of the free movement of capital since the location of the financial institute keeping the account is irrelevant as German inheritance tax would be levied in any case. The Court, moreover, did not find the risk of double taxation to be decisive for the matter. Even though the absence of a right to credit would in fact lead to a higher tax burden when money is deposited in a foreign bank, it regarded such disadvantage as the result of both member states exercising their right of taxation.

Case Block, C-67/08.

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