Table of contents
Swiss tax on gifts made five years prior to inheritance corresponds to German gift tax and is creditable against it.
In its ruling of 4 May 2022, the Düsseldorf Finance Court decided that foreign inheritance tax (in this case, Swiss inheritance tax) is creditable against German gift tax in accordance with Section 21 of the German Inheritance Tax Act (ErbStG) if both taxes relate to the same transfer of assets (file number: 4 K 2501/21 Erb).
Tax advisor Hergen Kassuba considers the court’s decision to be correct, as it avoids double taxation in cases where there is no double taxation agreement.
The plaintiff seeks to have a tax paid in Switzerland credited against German inheritance tax.
The plaintiff works for a Swiss employer and maintains residences in both H-Stadt (Switzerland) and G-Stadt. On 15 January 2021, she received a gift of CHF 500,000 from A (donor), resident in H-Stadt (Switzerland). The plaintiff submitted a gift tax return on 17 February 2021. In a notice dated 22 February 2021, which is subject to review, the defendant (the tax office) assessed gift tax in the amount of €132,840 against the plaintiff. The donor died on 00 March 2021.
The plaintiff lodged an appeal on 15 March 2021 and requested that the tax to be assessed in Switzerland be credited in accordance with Section 21 of the Inheritance and Gift Tax Act (ErbStG).
This would exceed the German tax burden, so that the German tax should be reduced to zero euros.
In a letter dated 22 March 2021, the defendant stated that the credit would first require the tax to have been assessed and paid in Switzerland. Furthermore, no credit could be given because the two transactions were different.
The current transaction dated 15 January 2021 concerned a gift. The addition of gifts to the taxable inheritance in Switzerland was an inheritance tax transaction. The gift was added to the assets subject to inheritance tax. It was therefore not possible to offset it against German gift tax.
In a decision dated 29 March 2021, the city of H (Switzerland) assessed the claimant’s tax liability and imposed an inheritance tax of CHF 200,000 on the claimant. In its decision of 1 April 2021, the city of H (Switzerland) reduced the inheritance tax to CHF 190,000.
In its appeal decision of 7 October 2021, the defendant rejected the appeal as unfounded.
The reservation of review was upheld. The defendant stated the following reasons: Section 21(1) sentence 1 of the German Inheritance Tax Act (ErbStG) requires that the foreign tax be a tax corresponding to the German gift tax. However, the German gift tax is contrasted here with a Swiss inheritance tax. In addition, the taxes were triggered by two different circumstances.
The German gift tax was triggered by the gift on 15 January 2021, while the Swiss inheritance tax was only triggered by the death of the donor.
The plaintiff filed a lawsuit against this on 8 November 2021. Among other things, she argues that
The defendant fails to recognise that the Swiss notices expressly state: ‘The present assessment only taxes the gift to B, which took place on 15 January 2021.’ Therefore, it is not an inheritance that is being taxed, but precisely the gift that was already the basis for the defendant’s taxation.
It is irrelevant that the legal basis for this is the local inheritance tax law, which includes corresponding gifts in the assessment of inheritance tax assets. The date on which the tax arose is completely irrelevant in this respect. Nor can the terminology used in the tax legislation of the canton of H-Stadt be relevant. It is sufficient if it is a corresponding tax within the meaning of Section 21 (1) sentence 1 ErbStG.
Irrespective of whether the tax is referred to there as inheritance tax, it is clear from the notice itself that it is a tax on a gift that is identical to the gift taxed by the defendant.
The plaintiff requests in writing that the gift tax notice of 22 February 2021 in the form of the appeal decision of 7 October 2021 be set aside.
The defendant requests in writing that the action be dismissed. It refers to the appeal decision as justification.
The admissible action is well founded. The contested notice is unlawful and infringes the claimant’s rights, section 100(1) sentence 1 FGO.
The defendant wrongly refused the credit under section 21 ErbStG.
It states:
‘Gifts and advance payments made in the last five years prior to the death of the testator (…) shall be included in the calculation of the assets subject to inheritance tax’.
This shows that the gift itself is not taxed; rather, the advance gift is included as an additional item when determining the basis for assessing inheritance tax liability.
Accordingly, it is not only the recipient of the gift who owes inheritance tax; Section 6(2) ErbStG Lucerne stipulates joint and several liability on the part of the recipients of gifts and heirs:
‘The heirs are jointly and severally liable with and alongside the beneficiary or their legal successor for the payment of this part of the tax, but only up to the amount of the estate. The payer retains the right of recourse.’
Even according to the meaning and purpose of § 6 (1) ErbStG H-Stadt (Switzerland), the tax in question cannot be classified as gift tax. The gift would not have triggered any taxes if the donor had not died within five years of the gift being made. The fact that, from the plaintiff’s point of view, only the gifted amount of money was ultimately subject to taxation is due to the fact that the plaintiff did not become the donor’s heir and did not acquire any further assets. This is also how the reference in the Swiss tax assessment notices should be understood, namely that ‘only the gift’ to the plaintiff is taxed (pp. 20, 24 of the court file).
Since gifts, unlike inheritances, are not taxable in the canton of H-Stadt, there is a risk that, in the event of a foreseeable inheritance, assets will be transferred by way of anticipated succession and thus withdrawn from taxation. Only this function as a standardised anti-abuse rule justifies subjecting gifts to tax within a certain period before the inheritance, even though gifts are generally not taxable. The plaintiff is therefore treated as if she had become an heir and had received the sum of CHF 500,000 not by way of gift but by inheritance.
Unlike in Germany, it is therefore not a generous gift that is taxed, but an inheritance.
c)However, there are compelling reasons to allow the deduction nonetheless. Ultimately, the identical transfer of assets– the transfer of the sum of CHF 500,000 – is taxed in both Germany and Switzerland.
Based on identical circumstances, Swiss tax law ultimately considers the plaintiff to be an heir, as described above, while German tax law assumes that a gift was made.
However, these two considerations are mutually exclusive: the plaintiff can only have received the sum of money in question either by way of inheritance or by way of gift. Although double taxation is not necessarily inadmissible from a constitutional point of view according to the case law of the Federal Fiscal Court (BFH) and can also be remedied in individual cases by measures of equity (BFH, judgment of 19 June 2013 – II R 10/12, BStBl. II 2013, 746, para. 30 et seq., para. 37, with further references; cf. however Jochum, in Wilms/Jochum, ErbStG/BewG/GrEStG, § 21 ErbStG para. 10 (11/2020)), it seems formalistic to use the different legal classification as a reason to subject the identical transaction to double taxation.
This is because the objectively recognisable purpose of § 21 ErbStG, which is to avoid double taxation of asset transfers even in cases where there is no double taxation agreement, can only be achieved if the economic and functional effects of the foreign tax are taken into account (Jochum, in Wilms/Jochum, ErbStG/BewG/GrEStG, Section 21 ErbStG marginal number 46 (11/2020); Eisele, in Kapp/Ebeling, Section 21 ErbStG marginal number 6 (11/2021); Jülicher, in Troll/Gebel et al., Section 21 ErbStG margin number 21 (5/2018)). The case law of the Federal Fiscal Court (BFH) also shows that foreign tax is to be credited to the extent that it ‘applies’ to the taxed gift (judgment of 7 September 2011 – II R 58/09, BStBl. II 2012, 40, margin note 12, 24). This also argues against a formalistic view and in favour of crediting.
This result is confirmed by the final judgement of the Cologne Finance Court (FG) of 29 June 2011 (9 K 2690/09, Decisions of the Finance Courts – EFG – 2012, 152, para. 37).
The case decided there was based on a very similar provision of Belgian tax law: a gift that was tax-exempt in itself was subject to Belgian inheritance tax because the donor had died within three years of making the gift. The Cologne FG affirmed a credit against German gift tax and stated the following with regard to the correspondence clause:
‘Since the plaintiff’s father died within three years of this gift, this gift is subject to Belgian inheritance tax and is therefore also subject to a foreign tax corresponding to German inheritance tax’ (judgment of 29 June 2011 – 9 K 2690/09, EFG 2012, 152, para. 37).
The Cologne Fiscal Court also assumed, albeit without giving detailed reasons, that the equivalence clause does not preclude the crediting of foreign inheritance tax against German gift tax in such cases.
According to this provision, foreign tax is only creditable if the German tax has been incurred within five years of the date on which the foreign tax arose.
This wording could be understood to mean that a credit would be excluded if the German tax – as in this case – arose before the foreign tax.
However, the Cologne Fiscal Court took a different view in its final judgment of 29 June 2011 (9 K 2690/09, EFG 2012, 152, para. 56 ff.). The Senate concurs with this view, as neither the legislative history (cf. BT-Drucks. VI/3418, p. 73) nor from the purpose of the norm are there any discernible reasons to exclude a credit in such cases, as long as the correspondence clause is fulfilled. In this respect, reference is made to the statements of the Cologne Fiscal Court, which the Senate endorses and which the tax authorities have also adopted (R E 21 (2) ErbStR 2019).