Inhaltsübersicht

Avoiding double taxation in German-American inheritance cases: A guide

Imagine that someone in the US dies and leaves behind assets. The US has a tax that is levied on assets that are passed on after a person’s death. This tax is called “federal estate tax” in the US. At the same time, if someone in Germany inherits assets or receives them as a gift, they must also pay tax on them in accordance with the German Inheritance and Gift Tax Act.

Now here’s the problem: if someone inherits assets from a person who lived in the US but has to pay tax in Germany (or vice versa), those assets could theoretically be taxed in both the US and Germany. This is called double taxation because the same assets are taxed in two different countries. To solve this problem, Germany and the US have concluded an agreement called the “Agreement between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation with respect to Taxes on the Estate, Inheritance, and Gifts” (in short: DBA-USA-Erb). This agreement specifies how such cases are to be handled so that the assets are not taxed twice. It helps to establish clear rules on which taxes must be paid where in order to find fair solutions for heirs and donors.

The Double Taxation Agreement (DTA-USA-Erb)

The agreement between Germany and the US for the avoidance of double taxation in the case of inheritances and gifts (DTA-USA-Erb for short) applies to two main cases:

For estates: When someone dies who was resident in either the US, Germany, or both countries at the time of their death. This means that the agreement is applicable if the deceased persons lived in one or both countries.
For gifts: When someone who was resident in the USA, Germany, or both countries at the time of the gift gives something away. In other words, when someone who lives in one of these countries transfers assets to others during their lifetime.

Important terms and their meanings

Residence: The term “residence” in this context refers to a specific definition that is explained in detail in the agreement itself. It is a matter of determining in which country a person is officially considered to be resident, which is important for the application of tax rules. This simply means that the agreement establishes certain rules for how inheritances and gifts are taxed when the persons concerned reside in Germany or the US. It helps to clarify which taxes must be paid in which country in order to avoid double taxation.
Permanent residence: If someone has a residence in both the US and Germany, then it depends on where that person has a “permanent residence” in order to decide which country is considered their tax residence. A “permanent residence” here does not simply mean any accommodation or home that one owns or rents. A permanent residence is a place that, in terms of size and furnishings, corresponds to the person’s living circumstances and where they stay not just occasionally, but regularly. It is about having a fixed and permanent place of residence that truly serves as a home, where one lives and does not just travel to occasionally for short stays. This means that if someone has residences in both countries but only maintains a real home in one of the countries, which they use as their main residence, then that country is considered their tax residence.
Center of vital interests: The “center of vital interests” refers to the place where a person has the strongest personal and economic ties. So if someone has a permanent residence in both countries or in neither country, one looks at where that person has their closest ties. These include:
- Personal relationships: This includes family ties, such as regular visits and the presence of family members nearby, social relationships such as friendships and club memberships, political activities such as voting or party memberships, and cultural participation, e.g., in local events or cultural circles.

- Economic ties: This refers to professional ties, business interests, or investments in one of the countries.

When it comes to deciding which country is considered the tax residence, personal ties often carry more weight than economic ties. This means that the country with which the person has closer personal (and also significant economic) ties is considered their tax residence. For example, if someone has a green card for the US, this indicates an intention to live there permanently, but it is only one part of the overall consideration in determining the center of vital interests.

Special regulations and their impact

What does the 10-year rule say about moving? The 10-year rule, which is set out in the double taxation agreement between Germany and the US, refers to how a person’s home country is determined when they have moved. If someone has moved from their home country (e.g., Germany) to another country (e.g., the US) within the last ten years before their death, they are still considered to be resident in their original home country. This means that if a person moves from Germany to the US nine years before their death, for example, they are considered to be resident in Germany for estate tax purposes. This rule helps to clarify tax residency and avoid potential ambiguities in the taxation of estates of individuals who moved relatively shortly before their death.
Treatment of trusts: In German-American inheritance cases, it is often the case that assets are bequeathed via a trust, i.e., a type of fiduciary fund. A trust can be structured in such a way that it is “opaque,” meaning that the assets and income within the trust are not directly allocated to the beneficiaries (the persons who receive benefits from the trust) and are therefore not immediately taxed. Instead, taxation only takes place when distributions are made from the trust to the beneficiaries. In such cases, where the transfer of assets to the trust itself is not taxed, but taxation is deferred until the time of distribution to the beneficiaries, it may be possible to avoid tax liability. If the beneficiary relocates their residence in accordance with the rules of the double taxation agreement (DTA) between Germany and the US before a distribution takes place, there may be no tax liability in the country where the trust was originally established or where the testator was resident. This means that, in certain situations, transferring residence in accordance with the provisions of the DTA-USA inheritance can result in no inheritance or gift tax being payable if and because taxation is linked to distributions from a trust and not immediately upon the transfer of assets to the trust.

Tools for avoiding double taxation

Double taxation can also be avoided through credit. As described in Article 11 of the double taxation agreement (DTA) between Germany and the US, this is an important principle for ensuring that assets, inheritances, or gifts are not taxed in full in both countries.

The principle of credit means that if taxes have been paid on an inheritance, gift, or similar in one of the two countries (either Germany or the US), these taxes can be credited in the other country where tax liability also exists. The tax paid in one country is therefore credited against the tax liability in the other country to prevent the same assets from being taxed twice.

In concrete terms, this works as follows: For example, if inheritance tax has been paid in the US on assets that are also taxable in Germany, the amount of tax paid in the US can be deducted from the tax liability in Germany. This reduces the overall tax burden and achieves fair taxation by preventing the heir or beneficiary from having to pay full taxes on the same assets in both countries.

The proportional granting of the US allowance, the spousal allowance, tax exemption for pensions, annuities, and much more are also options. All of these methods of crediting are common procedures in international tax agreements to effectively avoid double taxation and to make the tax burden fair for the persons concerned.

Conclusion

Avoiding double taxation in German-American inheritance cases requires careful planning and a thorough understanding of the applicable laws and agreements. The DBA-USA inheritance provides a framework within which heirs and donors can navigate, but the complexity of the matter underscores the need for professional advice. Through strategic planning and use of the mechanisms provided for in the agreement, those affected can minimize their tax burden and ensure fair treatment of their international estate.

Given the complex regulations and high financial stakes, it is strongly recommended to seek professional help in German-American inheritance cases. As a tax advisor specializing in international inheritance and gift tax, I can not only help you avoid pitfalls, but also point out ways to effectively minimize your tax burden.

Careful planning and knowledge of the specific rules of the DBA-USA inheritance are crucial to ensuring a fair and efficient settlement of the estate. This ensures that the testator’s wishes are fulfilled in accordance with legal requirements, while at the same time protecting the rights of the heirs.

In a world where international relationships and asset transfers are becoming increasingly common, it is more important than ever to be aware of the tax implications and take proactive measures to avoid unnecessary burdens. Investing in qualified advice not only pays off financially, but also provides security and clarity in an otherwise complex legal field.

If you are facing the challenge of navigating a German-American inheritance case, please do not hesitate to call me. The right advice can make all the difference, not only in saving costs, but also in ensuring that your estate is handled the way you want it to be.

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