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26. August 2022 | Cross-border inheritances: origin of inheritance tax in Germany

Cross-border inheritance has become commonplace. Foreign assets are inherited domestically or domestic assets are inherited abroad. However, there is something to consider here. In order to determine the relevant time for taxation, the foreign substantive law must be analyzed and compared with German law. Therefore, it is not only important to understand the German civil and tax criteria. Rather, it is also important to know the foreign regulations. We provide the following advice on how best to make the comparison and check the timing of taxation on some cross-border inheritances.

The inheritance tax arises according to § 9 (1) no. 1 ErbStG in the case of acquisitions of property upon the death of the deceased. Such acquisition shall be deemed to be, inter alia, the acquisition by inheritance (§ 1922 BGB) or by legacy (§ 2147 BGB). Therefore, the ErbStG for taxation is linked to the regulations of the German BGB.

German inheritance tax also covers inheritance cases to which German inheritance law does not apply, but whose execution is regulated in foreign inheritance law. The ErbStG is shaped by German civil law and tailored to it. Nevertheless, from an economic point of view, German tax law must also include assets that are subject to foreign inheritance law.

However, German inheritance law is not always applicable for cross-border inheritance. Rather, it is always necessary to check in individual cases under which succession law the civil succession takes place.

After the so-called two-stage object qualification, in cases of cross-border inheritance, it is first to determine whether the foreign legal institute is to be assigned to the German legal institutes. If this does not succeed, at the second stage it must be decided, according to an economic approach, which legal institution corresponds most closely to the foreign one. The comparability required for this purpose must be determined on the basis of the facts, but also on the basis of the legal consequences and economic significance of the regulations for the succession. It is necessary to determine which acquisition covered by the ErbStG equals the respective asset accrual in its economic significance.

The question of when the inheritance comes is relevant to whether there is a tax liability in Germany. According to § 2 (1) no. 1 Alternative 3 sentence 2 letter a ErbStG, this depends on the event triggering the acquisition of the inheritance. Therefore, it is important for foreign assets to determine when the German inheritance actually inherits the assets. In the case of multi-act inheritances, the inheritance may move to another country before the acquisition is actually completed. For this reason, inheritance tax raised the question of which date is relevant for taxation pursuant to § 9 ErbStG.

German inheritance law is based on the principle of universal succession, in which the estate passes to the heir or heirs at the time of death by law. Therefore, in purely domestic situations, death is usually linked to the origin of the inheritance tax. The cross-border inheritance is therefore taxable in Germany from the time from which the estate passes into the property of the heir under the applicable foreign law.

According to Italian law, an acceptance of the inheritance is required for the fall of inheritance. This affects the time of the death of the deceased, article 459 sentence 2 Codice Civile. Therefore, in terms of inheritance tax, the question arises as to which point in time is relevant for taxation pursuant to § 9 ErbStG. The date of death or the date of acceptance of the inheritance required by Italian law would be conceivable. If the time of acceptance were decisive and the taxpayer would have moved to Italy before, it could be that he is no longer (unrestrictedly) taxable in Germany at that time.

In Italian law, the inheritance is subject to acceptance, so that the acquisition in Italian inheritance law cannot take place solely by law. However, the acceptance does not entail any acquisition by virtue of legal transactions. It merely constitutes a legal act which comes alongside other acquisition requirements. A distinction must be made between real conditions within the meaning of § 158 BGB and merely multi-act acquisition events on the other hand. With a real condition in the German sense, there is no retroactive effect. A real condition develops its legal effect ex nunc, that is, from the occurrence of the condition. In Italian inheritance law, on the other hand, the acceptance affects the time of death and therefore applies ex tunc (Articles 456, 459 Codice Civile).

If the condition for acquisition has retroactive effect under foreign law, the acquisition is such within the meaning of § 9 (1) no. 1 ErbStG. Inheritance tax therefore arises at the death of the deceased and not at the time of the declaration of acceptance. The fact that there is a state of limbo before acceptance also does not lead to a comparability with a real German condition, since the fall of inheritance in German inheritance law is not 100% certain, but still changeable by rejection. Therefore, the normal German inheritance is also in limbo.

In Spain and Portugal, as in Italy, the acceptance of inheritance by the heir is required. In both cases, this declaration of acceptance also has retroactive effect. Therefore, the German inheritance tax also arises here at the time of death, because it is each a legal condition.

But there are also some countries in which the acquisition is also carried out by law as in Germany. These include France, Greece, Slovenia, Poland or the Netherlands. Outside the European Union, this also applies to Switzerland, Iceland and Turkey. Therefore, the inheritance tax also arises here with the death of the deceased.

In the estate trust under Anglo-American law, the legal predecessor is not the deceased, but the trust, since this is an independent legal entity. According to the Bundesfinanzhof (BFH), the acquisition of the trust is regularly a suspensive acquisition, so that the inheritance tax arises only with the termination of the trust.

The legislature has created for these cases the special provision of § 9 (1) no. 1 letter c ErbStG, according to which the inheritance tax then arises with the transfer of the property to the trustee. This applies in any case to the asset-management version of the trust, the so-called estate trust. Something else can apply if the administrator or executor only has to pay the estate liabilities and return the then unencumbered trust to the beneficiary. In this case, a comparability to the German will is given and the regulation can again fall under § 9 (1) no. 1 ErbStG

In the Austrian abandonment procedure, a declaration of inheritance of the potential heirs is required in the first step and then the court answer. The latter is the transfer to legal ownership. The court response therefore has constitutive significance for the acquisition of the inheritance. Until the court responds, the estate rests and constitutes a separate legal entity that holds the deceased’s rights and liabilities. Only with the legal force of the court reply decision does the universal succession occur on the heir.

It is therefore questionable when the inheritance tax arises. However, since it does not depend on the retroactive effect of the subsequent event – here the court order to respond – the inheritance tax would also have to arise in this case with the death of the deceased. The declaration of inheritance and the reply are as legal conditions no condition within the meaning of § 158 BGB, so that there is no suspensive acquisition.

On the other hand, however, the argument is that the estate resting until the reply is itself legally competent and therefore belongs to itself. The universal succession to the heir takes place only with the formal legal force of the decision to respond. Similarity thus exists to the estate trust under Anglo-American law.

However, the heir who has accepted the inheritance is entitled to use and represent the estate in accordance with § 810 ABGB, even if he has not yet become the owner before the submission. Therefore, his dispositions affect the hereditary mass. Consequently, he has already acquired a right of entitlement before the reply. In this respect, the estate is not comparable under Austrian law to an estate trust in which the trustee, not the beneficiary, manages the assets.

Inheritance tax therefore also arises in the case of succession under Austrian inheritance law already with the death of the deceased.

The decisive factor is that upon the death of a natural person, his property is transferred to one or more heirs by way of universal succession. Details of how this transmission works therefore do not matter. Only if, after the deceased, another legal entity receives the property first, this may be decisive for the origin of the tax, so that a later date than death would be decisive for the origin of the tax. We are happy to examine your individual case and create an individual design model for you to reduce inheritance tax.