German Law on inheritance and gift tax: New regulations for situs taxation in force
Pursuant to Section 16(1) of the German Law on inheritance and gift tax (Erbschaftsteuer- und Schenkungssteuergesetz) a taxpayer is entitled to acquire up to €500 000 tax-free depending on the degree of kinship. Under § 16 (2) ErbStG, this favorable exemption was only available to German residents and/or citizens. Accordingly, if both the testator and heirs were not residents of Germany only estate assets in Germany would be taxed (situs taxation), however, the exemption would be a mere €2 000. Equivalent provisions also applied in the case of gift tax.
On April 22, 2010, the European Court of Justice (ECJ) held that § 16 (2) of the German Law on inheritance and gift tax (Erbschaftsteuer- und Schenkungssteuergesetz) breached the provisions on the free movement of capital contained in article 56 of the EC Treaty. The Court held that it breached the treaty insofar as it denied the full gift tax allowance to a Dutch resident who was gifted real estate situated in Germany by her mother who was also a Dutch resident (Vera Mattner v. Finanzamt Velbert, C-510/08). In March of 2011, the European Commission formally requested that Germany amend § 16 (2) of the German law on inheritance and gift tax.
As a consequence of the ECJ’s ruling, Germany added a new section to § 2 ErBStG. According to § 2 Abs. 3 S. 1 ErbStG a beneficiary can chose that the rules of unlimited taxation apply, if either the decedent or the beneficiary resides in the EU or the EEA. If he chooses the application unlimited taxation of his acquisition, his whole acquisition, irrespective where the assets are situated, will be taxed in Germany. However, he will profit from the full tax allowance.
The new law is in force for all taxable acquisitions after December 13th 2011. However, taxpayers can chose that the rules of unlimited taxation apply even for taxable acquisitions prior to this date, if the tax assessment hasn’t become binding. Accordingly, we recommend that practitioners check if choosing unlimited taxation is favourable to their clients and they (still) have the right to chose unlimited taxation.
