German Inheritance Tax

Transcription

1 German Tax Law German nheritance Tax This article provides a brief introduction to the German inheritance tax. Jerome Synold, Attorney-At-Law Jan-Hendrik Frank, German Attorney-At-Law German nheritance Tax and Gift tax law is codified in the German nheritance 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. Taxation of Transfer of property on death German inheritance tax but is imposed on any transfer of property at death 1, e.g. An inheritance, a specific bequest, a claim to the forced share Donation on death (donatio mortis causae), Transfer on death to a foundation or trust, Any compensation for a waiver of inheritance rights. German inheritance tax does not tax the estate itself but the beneficiary must pay the German inheritance tax on all transfers in his favor 2. Taxable Transfers in Germany Unless a Double Taxation 3 stipulates otherwise, Germany taxes all worldwide transfers, if either the beneficiary or the deceased is a German taxpayer at the time of his death. Germany taxes all worldwide transfers, if either the beneficiary or the deceased is a German taxpayer at the time of his death. An individual is a German taxpayer if he or she has either a permanent home or a habitual abode in Germany 4. 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 nheritance 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 5. Any stay exceeding six months or longer in Germany is deemed to lead to a habitual residence within Germany. f 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 6. Situs taxation in Germany f neither the deceased nor the beneficiary is a German taxpayer, the beneficiary will generally only be subject to German nheritance Tax based on German situs property. German situs property includes the following 7 : 1. domestic agricultural and forestry assets; 2. domestic property assets; 3. 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; 4. 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; 5. inventions, utility models and layout designs not covered by point 3 which are registered in a national book or register; 6. 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; 7. 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; 1 1 (1) Nr. 1 German nheritance and Gift Tax Act 2 20 (1) German nheritance and Gift Tax Act 3 Currently there are only Double Taxation agreements in force with the USA, Sweden, Switzerland, Denmark, Greece and France. 4 8 German General Tax Code 5 9 German General Tax Code) 6 2 (1) Nr. 1. German nheritance and Gift Tax Act 7 2 (1) Nr. 3 German nheritance and Gift Tax Act, 121 of the German law for the valuation of assets German nheritance Tax 1

2 8. 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; 9. Rights of enjoyment attached to one of the assets referred to at points 1 to 8. Bank accounts with a German bank or a branch of a foreign bank in Germany are not subject to taxation because of situs. The entire estate is not taxed. However, in this case, the taxpayer does not benefit from the full tax free amount. n some cases this may lead to a higher tax due than in case of unlimited tax liability. n 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 EU or the EEA 8. f 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 nheritance Tax The German nheritance and Gift Tax Act provides for significant deductions. Community property and other issues of the matrimonial property regime n many jurisdictions the spouses acquire joint property during the marriage. n such cases, only the share of the first dying spouse is taxable under the German nheritance Tax Act. Under German law, there is generally no spousal community property unless the spouses agree to such an arrangement in a contractual agreement. However, the surviving spouse will receive one half of the surplus of the other spouse when marriage ends because one spouse dies (community of accrued gains). As the surviving spouse has a right to the accrued gains and his claim is not subject to taxation 9. 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 10. The family home must be personally used as principle home for another 10 years after death 11. f there are pressing reasons why the surviving spouse cannot use the family home for his or her own purposes 8 2 (3) S. 1 German nheritance and Gift Tax Act 9 5 German nheritance and Gift Tax Act (1) 4 b. 1 German nheritance and Gift Tax Act (1) 4 b. 2 German nheritance and Gift Tax Act. (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. f 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. f the living space exceeds 200 square meters, the portion exceeding 200 square meters is liable to tax. Relief for Business Assets, nterests 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. Basic business asset relief f the beneficiary chooses the basic tax relief, 85% of the business assets will be exempt from the tax base if: The business is continued for a minimum of five years and the direct wage costs during this period amount to 400 % of the average wage costs in the last five years before the tax accrues 12 There is an additional tax allowance for a transfer of business assets amounting to a maximum of EUR 150,000. Business property may only benefit from the basic relief if it does not contain more than 50% of passive non-operating assets. Non-operating assets are land, portions of land, land rights and buildings provided to third parties for use and shares of 25% or less in a subsidiary corporation. Optional business asset relief f the taxpayer chooses the optional relief, 100% of the business assets will be exempt from taxation, if: The business is continued for a minimum of 7 years and The direct wage costs during this period amount to 700 % of the average wage costs in the last 7 years before the dated of death Business property may only benefit from the basic relief if it does not contain more than 10 per cent of passive non-operating assets (1) a German nheritance and Gift Tax Act. German nheritance Tax 2

3 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 nheritance 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. Other tax exemptions and tax relief Other tax exemptions and tax relief of the German nheritance 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 (otherwise up to EUR 12,000) 13. Movables (e.g. personal jewelry) are tax exempt up to 12, 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 15. 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. 16 Gifts to churches recognized as such in Germany and to Jewish cultural communities in Germany 17 Gifts to German charities 18 Gifts to foreign churches and charities, if the foreign government grants similar tax exemptions to German churches/charities 19. Estate debts and costs of administration Estate debts (debts that have occurred before the date of death) can be deducted from the taxable estate. Generally, costs of the administration of the estate are not deductible. However, costs that are necessary to administer the estate (e.g. court fees) can be deducted. Costs that were necessary to fulfill the wishes of the testator can also be deducted. Thus, 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. 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) 20. Tax Classes 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 21 : Beneficiary is... the spouse the divorced spouse the registered same sex partner a child (including step-children) a child of a child an offspring of a living child a parent or other ascendant (transfer on death) a sibling (brother or sister) a nices or nephew a step-parent a parents-in-law a daughter-in-law or son-in-law any other person Tax free allowances Tax class The tax allowance depends on the familial relationship between deceased and beneficiary. n case of unlimited tax liability - the following tax free allowances apply 22 : Beneficiary is... the spouse divorced spouse a registered same sex partner A child (including step-children) a child of a predeceased child an offspring of living children a parent or another ascendant a sibling (sister or brother) a niece and nephew a step-parent a parents-in-law a daughters-in-law or son-in-law another person (1) 1. a) German nheritance and Gift Tax Act (1) 1. b) German nheritance and Gift Tax Act (1) 3 German nheritance and Gift Tax Act (1) 2 German nheritance and Gift Tax Act (1) Nr. 16 a) German nheritance and Gift Tax Act (1) Nr. 16 b) German nheritance and Gift Tax Act (1) Nr. 16 b) German nheritance and Gift Tax Act German nheritance and Gift Tax Act German nheritance and Gift Tax Act (1) German nheritance Tax Act German nheritance Tax 3

4 An additional tax free 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 nheritance tax (see above). f 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. f so, the allowance will be reduced by the net present value of such pension claims. The tax free amount under 16 and 17 German nheritance 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. 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 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 23. f 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. f A had made the donation in 1999, he could have used the exemption of ,-- 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). 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) 24. 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) German nheritance and Gift Tax Act (2) German nheritance and Gift Tax Act As a consequence, Germany added a new section to 2 German nheritance and Gift Tax Act (see above). As 2 (3) S. 1 German nheritance and Gift Tax Act does not apply with regard to other countries (e.g. U.S., Canada, Switzerland), the regional tax court of Duesseldorf 25 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 26. Transfer up to Tax rate in every tax class in % More than Deduction of Foreign Estate and nheritance taxes Upon application a foreign tax will be offset against the German inheritance tax if: either the deceased 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 tax 27. 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 28. However, it can be deducted as estate debt or as expenses of administration of the estate 29. f 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. This does not violate European law Finanzgericht Düsseldorf, 4 K 689/12 Erb (1) of the German inheritance tax act 27 R E 21 ErbStR 2011; BFH, R 32/86 28 BFH , R 13/92 29 BFH , R 13/92 30 EuGH, matter Block, C-67/08 German nheritance Tax 4

5 Personal Tax Liability under the German nheritance and Gift Tax Act The beneficiary must pay the German inheritance tax 31. However, the Executor is obliged to make sure that the inheritance tax is paid 32. 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). 33 clearance certificate ( Unbedenklichkeitsbescheinigung ) is provided. Future Development of the German nheritance Tax The Federal German Financial High Court (decision of 27. September 2012, file number R 9/11) has expressed its doubts concerning the constitutionality of the German nheritance and Gift Tax Act and has requested the German constitutional court (Bundesverfassungsgericht, BVerfG) to give a ruling on the constitutionality of the nheritance and Gift Tax Act. t is anticipated that the BVerfG will hold, that the German nheritance tax violates German constitution and will ask the German Legislator to change the law within a certain time frame. Thus, these prospective changes to the German inheritance Act should be taken into consideration. Jan-Hendrik Frank, Rechtsanwalt und Fachanwalt für Erbrecht frank@wf-inter.com Duty to disclosure According to 30 German nheritance and Gift Tax Act, the beneficiaries are obliged to inform the German tax authorities within three month of any acquisition. f 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. f 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. nheritance Tax clearance certificate f 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 Jerome Synold, Attorney-At-Law synold@wf-inter.com Determination of the tax due Determine: all transfers on death Determine: unlimited or limited tax liability? Determine all assets that underlie tax liability Deduct tax exempt assets Deduct estate debts and costs of administration according Assess taxable assets Deduct general and special tax free allowances Add lifetime Gifts Determine tax class Apply tax rate Deduct foreign estate and inheritance taxes (1) German nheritance and Gift Tax Act (1) 2 German nheritance and Gift Tax Act 33 See Taxation of US-Trusts in Germany German nheritance Tax 5