German Inheritance Tax


This article provides a brief introduction to the German inheritance tax.

German Inheritance Tax and Gift tax law is codified in the German Inheritance and Gift tax Act (Erbschafts- und Schenkungssteuergesetz”). Additionally, other German tax laws, such as the General Revenue Code (Abgabenordnung) and the Foreign Tax Act (Außensteuergesetz) contain relevant provisions.

German inheritance tax but is imposed on any transfer of property at death, e.g. an
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inheritance, a specific bequest, a claim to the forced share, transfer on death to a foundation or (not tax transparent) trust.

German inheritance tax does not tax the estate itself but the beneficiary must pay the German inheritance tax on all transfers in his favor. This is why it is called an "inheritance tax" and not an "estate tax".

Taxable Transfers in Germany

Unless a Double Taxation (there is a Double Taxation Agreement with the U.S., please see links at the end of this article) stipulates otherwise, Germany taxes all worldwide transfers, if either the beneficiary or the deceased was domiciled in Germany at the time of his death (Inländer).

Unless a Double Taxation stipulates otherwise, an individual is a German taxpayer if he or she has either a permanent home or a habitual abode in Germany.

The “permanent home” does not necessarily have to be the principal home of the person. A taxpayer has a “permanent home” in Germany if he possesses a home in Germany under circumstances from which it can be assumed that he will keep this home and use it. The German High Court of Finance ruled that even a stay of several weeks may satisfy the “permanent home” requirement if is the individual’s residence is on a regular basis for several years. Thus, persons who own property in Germany may be unexpectedly subject to German Inheritance and Gift tax and in their country of origin.

A habitual abode is found when an individual remains in a place (e.g. a long-term rented hotel suite) under circumstances from which it can be assumed that his stay at this place is not only temporary. Any stay exceeding six months or longer in Germany is deemed to lead to a habitual residence within Germany. If the deceased or the beneficiary is a German national, he is deemed to be a German taxpayer for another 5 years after giving up a German residence.

Situs taxation under the German Inheritance and Gift Tax Act

If neither the deceased nor the beneficiary is a German taxpayer, the beneficiary will generally only be subject to German Inheritance Tax based on German situs property. German situs property includes the following:

1. domestic agricultural and forestry assets;
2. domestic property assets;
3. domestic business assets;
4. shares in capital companies;
5. 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

Bank accounts with a German bank or a branch of a foreign bank in Germany are not subject to taxation because of situs.

Please note: In case of situs taxation, the taxpayer does not benefit from the full tax free amount. In some cases this may lead to a higher tax due than in case of unlimited tax liability. In order to avoid this, the beneficiary can chose that the application of the rules of unlimited taxation if either the decedent or the beneficiary resides in the European Community (EC) or the European Economic Area (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.

Tax exemptions and Reliefs of the German Inheritance Tax

The German Inheritance and Gift Tax Act provides for significant deductions.

Exemption for family home

The family home of the surviving spouse (or registered same-sex partner) is completely tax exempt, if it is located in the EC or EEA. The family home must be personally used as principle home for another 10 years after death. 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.

The tax exemption also applies if the family home is gifted to the spouse during the lifetime of the donor, provided that spouse uses the family home for his or her own purposes for a period of 10 years after the donation.

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

Pension Plans

Payments from German (or foreign) government pension schemes are not taxable in Germany. Company based plans are generally subject to taxation under the German Inheritance Tax Act. However, the German Federal Financial High Court has ruled that certain payments from company pension plans are tax exempt. Specifically, payments are exempt if the underlying contractual agreement was made between a person and his employer and the claim of that person is a result of his work. This is not the case if the deceased was self-employed or if he is manager of a company he owns. Some Double Taxation agreements contain more favorable rules for foreign pension plans.

Other tax exemptions and tax relief

Other tax exemptions and tax relief of 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 € 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 inheritance tax.
- Gifts to churches recognized as such in Germany and to Jewish cultural communities in Germany
- Gifts to German charities
- Gifts to foreign churches and charities, if the foreign government grants similar tax exemptions to German churches/charities.

Valuation

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

Tax Classes of the German Inheritance Tax Act

The tax rate of the German inheritance tax depends on the tax class of the beneficiary. The tax class depends on the family relation between the deceased and the beneficiary:

Beneficiary is ... Tax class
the spouse I
the divorced spouse II
the registered same sex partner I
a child (including step-children) I
a child of a child I
an offspring of a living child I
a parent or other ascendant (transfer on death) I
a sibling (brother or sister) II
a niece or nephew II
a step-parent II
a parents-in-law II
a daughter-in-law or son-in-law II
any other person III

Tax free allowances of the German Inheritance Tax Act

The tax allowance depends on the familial relationship between deceased and beneficiary. In case of unlimited tax liability the following tax allowances apply:

Beneficiary is ... €
the spouse 500.000
divorced spouse 20 000
a registered same sex partner 500.000
A child (including step-children) 400 000
a child of a predeceased child 400 000
an offspring of living children 200 000
a parent or another ascendant 100 000
a sibling (sister or brother) 20 000
a niece and nephew 20 000
a step-parent 20 000
a parents-in-law 20 000
a daughters-in-law or son-in-law 20 000
another person 20 000

An additional tax allowance of up to EUR 256,000 is granted to the surviving spouse; provided that the surviving spouse is not entitled to pension payments upon the death of the spouse which are not subject to German Inheritance tax (see above). If the surviving spouse is entitled to such pension payments, the allowance will be reduced by the net present value of such pension claims.

An additional allowance 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 pension payments upon the death of their parent. If so, the allowance will be reduced by the net present value of such pension claims.

The tax free amount under § 16 and 17 German Inheritance and Gift Tax Act is granted for any “transfer” from the same person. Thus, a person may profit more than one time from the tax free amount.

Example:
An individual dies in 2010 and names his surviving spouse, S, sole heir. However, he gives to each of these 3 children, K 1, K 2 and K 3, € 400,000 tax free. 2013 S dies and gives to K 1, K 2 and K 3 € 400,000.

Transfers from the same person within 10 years are added to the calculation basis of the German inheritance tax.

Example:
If A had made a donation to his children in 2005, such donation would have been added to the transfer on death and, thus, the tax free amount would be exceeded.

This can be used to minimize the applicable tax.

Example:
If A had made the donation in 1999, he could have used the exemption of € 400,000 twice.

The tax free exemption is only EUR 2,000 if both the testator and the heir are not resident in Germany and, thus, only estate assets situated in Germany are taxed (situs taxation). On April 22, 2010, the European Court of Justice (ECJ) held that § 16 (2) of the German Law on inheritance and gift tax breaches the provisions on the free movement of capital contained in article 56 of the EC Treaty insofar as it denies the full gift tax allowance to a Dutch resident who is gifted real estate situated in Germany by her mother, also a Dutch resident (Vera Mattner v. Finanzamt Velbert, C-510/08). As § 2 (3) S. 1 German Inheritance and Gift Tax Act does not apply with regard to other countries (e.g. U.S., Canada, Switzerland), the regional tax court of Düsseldorf has asked the ECJ if § 2 section 3 of the German inheritance tax act violates European law.

Tax Rates

The tax rates depend on the tax class and the taxable transfer.

Transfer up to € 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 30 43 50


Deduction of Foreign Estate and Inheritance taxes

Upon application a foreign estate tax or inheritance tax will be offset against the German inheritance tax under certain conditions: Either the deceased must have been a German taxpayer and estate assets must be located outside of Germany which are taxable in Germany and abroad. The foreign tax must be comparable to the German tax. Estate taxes (e.g. US Federal Estate Tax) are generally comparable to the German inheritance tax. The Canadian Capital Gains tax on deemed disposition on death and similar taxes (e.g. Thai Capital Gains tax) cannot be offset against the German inheritance tax. However, it can be deducted as estate debt or as expenses of administration of the estate.

If unlimited tax liability in Germany derives from the fact that the deceased had a residence in Germany the foreign tax on foreign bank accounts cannot be offset against the German Tax unless a double taxation agreement provides otherwise (e.g. see Art. 10 of the German-American Double Taxation agreement). This does not violate European law.

Personal Tax Liability under the German Inheritance and Gift Tax Act

The beneficiary must pay the German inheritance tax. However, the Executor 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.

Taxation of Trusts

Prior to 1999, transfers of assets to trusts were not taxed by the inheritance tax act, just like German Civil Law, it did not recognize trusts as legal entities. Following the introduction of provisions drafted to target tax avoidance in 1999, the German government enacted provisions that provided for the taxation of transfers to a trusts, unless the trustee is – from a German perspective - a mere agent of the settlor or trust is only used as settlor retains all right (e.g. most grantor trusts / settlor interested trust).


Duty to disclosure

According to § 30 German Inheritance and Gift Tax Act, the beneficiaries are obliged to inform the German tax authorities within three month of any acquisition. If they fail to do so 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.

Tax return

There is no obligation to file an inheritance tax return unless the German tax authorities demand it. Generally, the beneficiaries must file an inheritance tax return for their respective acquisition. 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.

Inheritance Tax clearance 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 tax clearance certificate (“Unbedenklichkeitsbescheinigung”) is provided.

ABOUT THE AUTHOR: Jan-Hendrik Frank, German Certified Expert in Probate and Estate Planning Law
Mr. Jan-Hendrik Frank is German Lawyer (Rechtsanwalt) and bar certified specialist for probate and estate planning (Fachanwalt für Erbrecht). He is partner of “WF Frank & Partner LLP”, a law firm entirely specializing in international probate law and estate planning. He has been practicing estate planning and probate law exclusively since 2002. Mr. Frank's practice involves all aspects of probate law and estate planning, including will and trust planning, estate and trust litigation, advising executors, trustees and beneficiaries and administration of estates and trusts. His special focus are complex multi jurisdiction estates. Mr. Frank has been a frequent guest speaker (e.g. Delaware Banker's Association, Law Society of England & Wales) and has also written extensively in the area of trusts, estate planning, estate administration and estate litigation.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.

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