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23. June 2021 | No gift tax or inheritance tax in Austria

14. December 2021 | Succession planning: Basics for reducing the inheritance tax burden in the case of private asset succession

10. March 2022 | Significance and taxation of foreign trusts: gift tax and inheritance tax

05. February 2023 | German citizenship and taxes: where is the connection? (this contribution)

At first glance, German citizenship and taxes appear to be far removed issues. Finally, in income tax law as well as in many other tax types, residency is the decisive criterion with which the legislature establishes tax liability in Germany. However, there is an exception in the area of inheritance and gift tax law. This is because the law stipulates that an inheritance or gift tax is also relevant in Germany if a taxable person living abroad holds German citizenship. However, in the case of cross-border inheritances and donations, certain periods of five or ten years are also given, after which German citizens resident abroad no longer incur tax in Germany. Only then does a separation of the taxation characteristic nationality from the tax liability in Germany take place.

In this article we want to get to the bottom of the puzzle and answer whether German citizenship and taxes in this country are in any way connected.

Before we get into the topic, we need a little legal tools. Here we can differentiate between two areas.

On the one hand, in the question of whether German citizenship and taxes in this country are related, one should first clarify how to obtain German citizenship. Since this is not very relevant for the actual topic of this article, we will only deal with this in passing. It is also relatively easily clarified with a general answer: German citizenship is obtained by birth in Germany, descent from German parents or on request.

Conversely, however, the interest in the task of German citizenship in exchange for a foreign one after a discussion requires. However, since this is always related to foreign citizenship law, this question is misplaced in this framework, despite its fundamental relevance. The scope of such clarification alone deserves its own website.

On the other hand, we also have to deal with the aspect of taxes in Germany. Two tax laws are relevant here, namely the Inheritance and Gift Tax Act and the Foreign Tax Act. In the case of the Inheritance and Gift Tax Act, we explicitly refer to § 2 (1) no. 1 letter b ErbStG and § 4 in conjunction with § 2 AStG. It should be noted that these regulations affect both people who give away or inherit assets abroad and the recipients of the assets.

The link between German citizenship and inheritance and gift tax is located abroad. Because if a person in Germany has German citizenship and wants to move abroad, this has an influence on these taxes. Notwithstanding this, there are specificities and differences in international inheritance and gift tax law, depending on whether it involves an EU Member State or a third country; This is just a side note.

In general, it can be stated that the inheritance and gift tax law in the event of a German citizen moving abroad adheres to the collection of these taxes. However, this only applies if the taxable person has been unrestrictedly taxable in Germany for at least five years in the ten years before moving abroad. Otherwise, the downstream inheritance and gift tax liability in Germany is eliminated.

Therefore, if a wealthy German citizen to whom the aforementioned condition applies emigrate abroad and gives away or inherits property from there, this remains taxable in Germany on account of the German citizenship of this person. Conversely, this also applies to German citizens who emigrate and receive assets abroad as a result of a gift or inheritance. The world income principle applies here.

However, this deferred taxation right of the Federal Republic is limited in time. The period for this purpose expires five years after the taxable person has moved abroad. Only then will there be no inheritance or gift tax in Germany.

The land to which the deceased, the donor or the person receiving the property goes is of some importance. More specifically, this is about taxation in that country. If only low taxation takes place in this foreign country from the point of view of German tax law, the period of stay abroad is extended from five to ten years before the inheritance tax or gift tax in Germany loses its relevance.

It is interesting how the foreign tax law defines low taxation. On the one hand, there is a tax comparable to the German inheritance or gift tax abroad. If this is the case, it is examined whether the tax incurred abroad corresponds to at least 30% of the German tax (§ 4(2) AStG). This compares the tax actually incurred abroad with that which would arise in Germany. In this respect, this roughly follows the rules of the Foreign Tax Act with regard to income tax, where one has to expect one third instead of 30 % (§ 2 paragraph 2 AStG).

Specialised advice on

Tax aspects related to a planned emigration?

The fact that citizenship is of overriding importance in many respects should be well known (for example elections to the Bundestag, granting travel privileges (visa waivers) abroad). In Germany, however, we only have an exceptional opportunity to associate German citizenship with taxes. In fact, this is only exhausted in the area of inheritance and gift tax. Even here, this is only relevant if there is a foreign reference. Therefore, it is hardly surprising that this is unknown to the broad mass of the population. At most, high-net-worth individuals who also have cross-border tax connections in other respects that require tax advisory expertise should be aware of this fact. But even there, in our experience, it is quite likely that there is a need for information.

The linking of citizenship to tax laws in other countries is quite generally anchored. For example, there is an income tax obligation in the USA, which is also oriented towards citizenship. Indeed, such a connection has far-reaching consequences. Because in a country where the world income principle prevails, this means that you are always taxable regardless of the actual residence. Therefore, if such a taxable person is resident abroad and there is no tax liability, his income still remains taxable in the country in which he is obliged to tax by his nationality. Tax evasion of, for example, a US citizen to Dubai is therefore excluded.

Presumably it is this idea that led to a motion in the Bundestag in 2013 with the significant participation of the party Bündnis 90/Die Grünen, which aimed at linking citizenship to taxation. If you look at the matter from a purely patriotic perspective, then this demand even seems quite legitimate: whoever wants to be German should also be tax-obliged to his home country worldwide.

Considering, however, that this approach is actually only intended to deter particularly wealthy people from tax evasion, then one overlooks the fact that this would also affect many other German citizens abroad, for whom taxation would above all mean more effort. For example, many pensioners who spend their retirement abroad would, on the one hand, be spared German tax by double taxation agreements, but on the other hand would still be obliged to submit an additional tax return. Such a German tax declaration would be quite complex due to the foreign situation, so that the preparation by a tax consultant could be necessary.

However, it should also be clear that the tax liability condition based on nationality can easily be nullified by acquiring another nationality in exchange for the German one.

And so it is with the current inheritance and gift tax. Here, too, you can move abroad as a German citizen, acquire your nationality there and then leave the German. In this way, one relatively quickly escapes the German inheritance and gift tax. In fact, there is a wide range of countries worldwide where high-net-worth individuals in particular can prefer to naturalize. For this, one expects in return investments at home. Such regulations are generally called Citizenship by Investment programs. For example, this is the case in Austria, where no inheritance and gift tax currently exists.

And yet another example of how a gift tax in Germany can be avoided: Friede Springer managed to transfer an asset of about EUR 1,000,000,000 to Matthias Döpfner tax-free.

This shows that moving abroad to avoid an inheritance or gift tax in Germany is certainly worthwhile alternatives. With a clever tax design, you can stay true to your home country and still save taxes.