German Inheritance Tax

German Inheritance Tax

The article provides a short introduction to the Taxation of estates under the German Inheritance and Gift Tax Act without taking into consideration special rules under Double Taxation Agreements.

Applicable Tax Laws

The taxation of estates in Germany is codified in the German Inheritance and Gift Tax Act (ErbSt). Additionally, other German tax laws, such as the German General Fiscal Code (AO) and the Valuation Act (BewG).

Please note: Germany has tax treaties with the USA (Germany-U.S. Estate and Gift Tax Treaty), Greece, France, Sweden, Denmark and Switzerland, that may override German domestic law. 

Taxation of Transfer of property on death

German inheritance tax (Erbschaftsteuer) is imposed on any transfer of property at death. For example, tas is imposed on the following transfers: 

  1. An inheritance, a specific bequest and/or a forced share claim;
  2. Donation on death (donatio mortis causae);
  3. Transfer on death to a foundation or trust (see special article on taxation of trust under German tax law); and
  4. Any compensation for a disclaimer of inheritance (Ausschlagung). 

German inheritance tax does not attach to the estate itself but instead is imposed on the acquisition of the beneficiary. Accordingly, the beneficiary must pay the German inheritance taxes on all transfers received. 

Taxable Transfers in Germany

Germany taxes all worldwide transfers, if either the beneficiary or the deceased is a German taxpayer (Inländer) at the time of his death (§ 2 ErbStG). An individual is a German taxpayer if

  • he/she has either a residence (§ 8 AO) or a habitual abode (§ 9 AO) in Germany. 
  • he/she is a German citizen who has not lived abroad for continuous time of 5 years without having a residence in Germany (extended unlimited inheritance tax liability),
  • he/she is a German citizen employed by a German authority abroad (e.g. Germany Embassy).

A Corporsation, an association and/or a foreign pool of assets (Vermögensmasse) is a German taxpayer, if its registered office (Sitz) or place of effective management (Geschäftsführung) is situated in Germany. 

Situs Taxation in Germany

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 :

  • domestic agricultural and forestry assets;
  • domestic property assets;
  • domestic business assets, meaning assets used in connection with an industrial or commercial activity in Germany, where a permanent business establishment is maintained for that purpose in Germany, or where a permanent representative has been designated;
  • shares in capital companies, where the company’s registered office or central management is in Germany, and the shareholder, either alone or together with other parties connected to him within the meaning of Paragraph 1(2) of the Foreign Tax Act holds, either directly or indirectly, at least one tenth of the company’s initial or share capital;
  • inventions, utility models and layout designs not covered by point 3 which are registered in a national book or register;
  • economic assets not covered by points 1, 2 or 5 and which are at the disposal of a domestic industrial or commercial undertaking, in particular under a tenancy or lease;
  • 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, or on vessels registered in a national shipping register. Loans and debts in respect of which part debentures have been issued are excluded;
  • claims arising from participation in a commercial undertaking as a silent partner and from loans with profit participation, where the debtor’s domicile or habitual residence, registered office or central management is in Germany;
  • Rights of enjoyment attached to one of the assets referred to at points 1 to 8.

Important: Most financial investments in Germany (e.g. cash in account or shars in corporation) are not subject to taxation because of situs. However, the financial institution will only release such assets after it has received a tax clearance certificate (steuerliche Unbedenklichkeitsbescheinigung). 

Tax exemptions and Reliefs of the German Inheritance Tax

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

Community property and other issues of the matrimonial property regime

In many jurisdictions the spouses acquire joint property during the marriage. In such cases, only the share of the first dying spouse is taxable under the German Inheritance Tax Act.

Under the German laws governing matrimonial property (if applicable), there is no spousal community property unless the spouses agree to such an arrangement in a contractual agreement (antenuptial agreement, postnuptial agreement). However, in default of such an agreement, the surviving spouse will receive equalization of accrued gains when the marriage ends, e.g. because one spouse dies. The value of the equalization claim is tax exempt (see § 5 ErbStG).  

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 European Union (EU) or European Economic Area (EAA); and
  • the surviving spouse personally uses it as principle home for another 10 years after death. See § 13(1) Nr. 4 b ErbStG

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.

Estate planning consideration: The tax exemption also applies if the family home is gifted to the spouse during the lifetime of the donor. In this case their is no requirement to live in it for 10 years after the donation. Therefore, it may be advisable to gift the family home during lifetime. 

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

Relief for Business Assets, Interests in a Partnership or Substantial Shareholding

Germany has enacted extensive tax exemptions for business assets, interests in a partnership or substantial Shareholding resident in Germany, in the EU or in the EEA (hereinafter: business assets). A basic business asset relief and an optional business asset relief are available.

Pension Plans

Payments from German (or foreign) government pension schemes are excluded from taxation in Germany. Company based plans are generally subject to taxation under the German Inheritance Tax Act. However, the German Federal Fiscal Court (Bundesfinanzhof) held 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 manages a company he/she owns. Payments from foreign pension plans are tax exempt, if the pension plan resembles a German tax deferred pension plan. Nevertheless, it should be noted that German pension plans are somewhat unique and foreign plans often do not resemble German plans. 

Other tax exemptions and tax relief

Other tax exemptions and tax relief associated with 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 EUR 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; and/or
  • Gifts to foreign churches and charities, if the foreign government grants similar tax exemptions to German churches/charities.

Deductible Estate Debts and Costs of Administration

The following obligations imposed on the taxpayer (beneficiary) are deductible: 

  • Debts of the decedent (e.g. nursing home/hospice costs, guardianship expenses);
  • The value of a legacy, testamentary burden or forced share to be paid by the taxpayer;
  • The costs of the burial, an appropriate grave headstone, the usual grave maintenance with its capital value for an undetermined length of time, and the costs arising for the recipient as a direct result of handling and distributing the estate. Generally, such costs must be proven by filing support (e.g. invoices) together with the inheritance tax return. However, a standard deduction is provided in the amount of EUR 10,300 without any support.  

Generally, maintenance costs (e.g. electricity) and the costs for selling estate assets (e.g. real estate agent`s commission) are not deductible. However, if the testator instructed the executor in his will to sell all estate assets and distribute cash to the beneficiaries, all costs of selling the assets can be deducted. In international estate matters it is also arguable that a beneficiary who lives abroad and therefore cannot use the inherited property unless it is liquidated, can deduct the costs of selling such assets. 

Valuation

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

Personal Tax-free Exemptions

General Tax-free Exemption

The general tax-free exemption depends on the familial relationship between deceased and beneficiary. In case of unlimited tax liability - the following tax free exemption applies (see § 15 ErbStG and § 16 ErbStG):

Beneficiary is ...

Exemption in EUR

the spouse of the deceased

500,000

divorced spouse

20,000

a registered same sex partner

500,000

a child of the deceased (including step-children)

400,000

a child of a predeceased child of the deceased

400,000

a child of living children of the deceased

200,000

other offspring of a living child of the deceased

100,000

a parent or an other ascendant

100,000

a sibling (sister or brother) of the deceased

20,000

a niece and nephew of the deceased

20,000

a step-parent of the deceased

20,000

a parents-in-law of the deceased

20,000

a daughters-in-law or son-in-law of the deceased

20,000

an other person

20,000

Tax-free Exemption in Case of Situs Taxation

Prior to June 2017, the tax-free exemption under § 16(2) ErbStG was limited to EUR 2,000 in matters involving situs taxation. The European Court of Justice has since ruled in the cases Vera Mattner v. Finanzamt Velbert (Case C‑510/08) and Yvon Welte v. Finanzamt Velbert (Case C‑181/12)  that this reduced tax-free allowance violates European Law and that the full exemption amount under § 16(1) ErbStG must be granted. In response to aforementioned rulings, § 16(2) ErbStG was reformed. The newly enacted law became applicable on June 25, 2017 and holds that the personal tax free allowance under § 16(1) ErbStG shall also be granted in cases of situs taxation, but be subject to a reduction which is calculated as follows: 

All estate assets and gifts within a 10-year period not subject to German situs taxation

Divided by: All gifts in a 10-year period. 

Example: The decedent’s fiscal domicile at the time of death was Los Angeles, CA USA. At the time of her death, the decedent owned an apartment in Munich with a value of EUR 400,000. The value of her worldwide estate is determined to be EUR 1 million. The decedent gives everything to her son. Germany taxes only the value of the apartment. However, the tax-free amount of EUR 400,000 under § 16(1) ErbStG is not granted in full. Instead, it is reduced by EUR 240,000 under § 16(2) ErbStG: Tax-free exemption minus EUR 600,000 (estate assets not subject to German situs taxation) ./. EUR 1 million (all transfers in a 10-year period) × EUR 400,000 (tax free allowance) = EUR 240,000. Thus, the tax-free exemption under § 16(2) ErbStG is limited to EUR 160.000. 

Spousal tax-free exemption

An additional tax-free exemption 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 (§ 17 ErbStG). If the surviving spouse is entitled to such pension payments, the allowance will be reduced by the net present value of such pension claims.

Special tax-free exemption for children of the deceased

An additional tax-free exemtion 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 (§ 17 ErbStG). If they are entitled to such benefits, the exemption will be reduced by the net present value of such pension benefits.

"Per Transfer"

The tax free amount under § 16 ErbStG and § 17 ErbStG is granted for any “transfer” from the same person. Thus, a person may profit more than once 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 his children, K 1, K 2 and K 3, € 400,000 tax free. In 2013 S dies and gives to K 1, K 2 and K 3 € 400,000.

Transfers (upon death or inter vivos) between the same persons within 10 years are aggregated and the tax is (re-) calculated based on the aggregated taxable acquisition (§ 14 ErbStG). 

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.

Tax Rates and Tax Classes

The tax rates depend on the tax class and the taxable transfer. The tax class depends on the familial relationship between the deceased and the beneficiary:

Beneficiary is ...

Tax class

the spouse of the deceased

I

the divorced spouse

II

the registered same sex partner

I

a child of the deceased (including step-children)

I

a child of a predeceased child the deceased

I

an offspring of a living child of the deceased

I

a parent or other ascendant (acquistions moris causae)

I

a sibling (brother or sister) of the deceased

II

a nieces or nephew of the deceased

II

a step-parent

II

a parents-in-law

II

a daughter-in-law or son-in-law

II

any other person

III

The tax rate in each tax class can be taken from the following table:

Taxable acquisition (§ 10) up to EUR

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 than 26 000 000

30

43

50

Deduction of Foreign Estate Taxes and Inheritance taxes

Upon application a foreign tax will be offset against the German inheritance tax if:

  • either the deceased or the beneficiary was a German taxpayer
  • estate assets are located outside of Germany, which is taxable in Germany and abroad,
  • the foreign tax is comparable to the German inheritance tax,
  • the foreign tax was assessed and paid,
  • The foreign tax accrued within the last 5 years prior to the German tax.

Estate taxes (e.g. US federal Estate tax) are generally comparable to the German inheritance taxes. 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, such taxes can be deducted as estate debt or as expenses of administration of the estate. If unlimited tax liability in Germany is derivative of the fact that the deceased had a residence in Germany, the foreign tax on foreign bank accounts cannot be offset against the German Tax. This application 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.

German Inheritance Tax Return

There is no obligation to file a German Inheritance Tax Return (Erbschaftsteuererklärung) unless the German tax authorities demand it. However, according to § 30 German Inheritance and Gift Tax Act, the beneficiaries (and - if there is an executor - the executor) are obliged to report the transfer to the German tax authorities within three months of any acquisition (duty of disclosure). 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. On the basis of the information received from the beneficiaries and from other sources (e.g. banks), the German tax authorities determine if German inheritance tax may be due and - if this is the case - ask to file an inheritance tax return. Generally, the inheritance tax return must be filed by the heirs for their respective share of the estate. However, 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 for a German certificate of executorship. 

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. Such tax clearance certificate will be issued by the tax authority once it has determined that no tax is due or the assessed tax has been fully paid. 

Estate Income Tax Return

Generally, there is no German Estate Income Tax Return, as - under German law - an estate is not a separate legal entity for tax purposes. However, if there is a community of co-heirs (Erbengemeinschaft), income from assets administered by the community-of-co-heirs must be assessed each year (Erklärung zur gesonderten und einheitlichen Feststellung der Grundlagen für die Einkommensbesteuerung, or abbreviated: Feststellungserklärungen).

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