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If the inheritance has a foreign connection, it is essential to take into account the special features of international inheritance tax law. Such cross-border cases arise in particular when the deceased or an heir is resident outside Germany or when assets belonging to the estate are located outside Germany.
Specifically, there is unlimited inheritance tax liability if either the deceased or the heir is a resident of Germany. In this case, the entire inherited assets – including those located abroad – are subject to German inheritance tax. There is also unlimited inheritance tax liability if the deceased, as a German citizen, has not been living abroad for more than five years.
If neither the testator nor the heir is a resident, but the estate also consists of certain domestic assets (within the meaning of Section 121 of the Valuation Act), these assets are also subject to limited German inheritance tax liability.
According to Section 4 of the Foreign Tax Act, extended limited inheritance tax liability applies to taxpayers who, in the last ten years prior to the end of their unlimited tax liability, were subject to unlimited tax liability as German citizens for at least five years in accordance with Section 1 (1) of the Income Tax Act and had moved their place of residence to a low-tax country.
In many inheritance and gift tax cases, there is a risk of multiple taxation if the testator or heirs are resident in different countries or if foreign assets are inherited. The countries concerned have very different inheritance tax systems that are not coordinated with each other. Due to differences in the legal regulations, inheritances may be subject to inheritance tax several times.
Tax relief can be provided by tax credit options – such as the German regulation in Section 21 of the Inheritance Tax Act – or by double taxation agreements concluded between countries. The agreements are intended to avoid or at least mitigate double taxation with German and foreign inheritance tax. However, the application of these agreements is very complicated and by no means guarantees the avoidance of double taxation.
In the area of inheritance tax, Germany has only concluded such double taxation agreements with Denmark, France, Greece, Switzerland and the USA. The agreement with Greece only applies to certain types of assets.
The agreements with Denmark, France and the USA also cover gift tax, while the agreement with Switzerland, in particular, only covers inheritance tax. An agreement concluded with Austria is largely irrelevant now, as the Austrian inheritance and gift tax law has been repealed.
We specialise in international tax law. Tax advisor Hergen Kassuba is a specialist in international tax law and your ideal contact for questions relating to international inheritance tax.