Table of contents
In its ruling of 28 July 2022, the Federal Fiscal Court (BFH) once again decided that, under certain conditions, gift tax can be avoided by means of a chain gift (file number: II B 37/21).
The guiding principles of the BFH decision are as follows:
In a single notarised contract dated 26 May 2017, the father gifted a plot of land. He transferred the land to his daughter. The daughter is the plaintiff’s wife. In the same contract, the daughter transferred half of the co-ownership share to her husband, the plaintiff. As a result, the plaintiff and his wife each became owners of half of the property.
The defendant is the tax office (FA). It took the view that the share gifted to the plaintiff was a gift from the father-in-law to the son-in-law and calculated the tax in accordance with this family relationship in terms of tax class and allowance.
In his action, the plaintiff claimed that his wife had been the donor of his share. The tax court (FG) upheld the action after hearing the wife as a witness. Even though it contained elements that suggested the opposite, the contract was to be interpreted as meaning that it was not a direct gift from the intervener to the plaintiff, but a chain gift. The father had not restricted his daughter – the plaintiff’s wife – in her power of disposal with regard to the property.
The tax office appealed against the decision with a complaint against the non-admission of the appeal.
The complaint is unfounded.
It has been clarified in the case law of the Federal Fiscal Court that in cases where an asset of a person is transferred by way of a gift in accordance with Section 7 (1) No. 1 of the Inheritance and Gift Tax Act (ErbStG) and the recipient generously transfers the asset to a third party, the determination of the respective donor and the respective beneficiary must be based on whether the person passing on the asset has their own decision-making authority regarding the use of the gifted asset.
If someone receives a gift as an intermediary or agent and passes it on in full to a third party in accordance with an obligation, this is only considered a gift from the donor’s assets to the third party for gift tax purposes. Whether a beneficiary can freely dispose of a gifted item or must transfer it to a third party must be decided on the basis of the totality of the objective circumstances, taking into account the contracts concluded, their mutual coordination in terms of content and the objectives of the contracting parties that are recognisable from the wording of the contracts.
The obligation to pass on the item may arise from an express agreement in the gift contract or from the circumstances. The decisive factor is the lack of discretion on the part of the initial recipient (BFH judgments in BFHE 242, 158, BStBl II 2013, 934, Rz 13 to 17; extensive parallel decision of 18 July 2013 – II R 45/11, BFH/NV 2014, 43, margin numbers 16 to 20, and of 16 September 2020 – II R 33/19, BFH/NV 2021, 317, margin number 19, with further references). If the gift and the onward gift are combined in a single document, the first beneficiary does not normally have any freedom of choice, unless the contract or the circumstances clearly indicate otherwise (see BFH judgments in BFHE 242, 158, BStBl II 2013, 934, margin number 19, and in BFH/NV 2014, 43, margin number 22, each with further references).
At the first level (relationship between donor and first recipient), it must be examined whether, under civil law, it could already be assumed that the intervener made a direct gift to the plaintiff. If this were the case, the question of the power of disposal of a first beneficiary would no longer arise, as there would be no first beneficiary. Only if there are two consecutive gifts under civil law is it necessary to examine the power of disposal of the first beneficiary at the second level (relationship between first recipient/second recipient or third party).
At the second level, however, the FG clearly affirmed – as required – the power of disposal of the claimant’s wife. It stated that the wording of the contract allowed for an interpretation that she had her own power of disposal. However, based on the context, the FG does not refer to the second level here, but rather to the first level, as this is one of several reasons for the statement made, ‘[A] chain gift is indicated …’. In the further course of the text, it becomes clear that, in the opinion of the FG, there was no doubt about the power of disposal. This is evident, on the one hand, from the statement in the same paragraph that the interpretation of the contractual provisions does not indicate any restriction on the wife’s power of disposal and, on the other hand, from the concluding statement that there are no indications of a restriction on the freedom of disposal. Contrary to the tax authority’s interpretation of this statement, it follows from this that the FG considered the wife’s freedom of disposal to be clear. Since it saw no evidence that the powers to which the wife was fundamentally entitled under civil law had been restricted, it saw no reason for further discussion and therefore considered the situation to be clear.