Capital transfers through inheritance and inheritance are subject to inheritance and gift tax with their entire value. However, as the judgment of the Bundesfinanzhof (BFH) of 23.11.2022 (II R 37/19) shows, the tax consequences can be avoided by a foreign legacy. The reason for this is that the legacy itself does not constitute domestic assets within the meaning of § 121 BewG, but merely a right to such an economic good.

Two people were involved in this initial case. The deceased, who had her residence in Switzerland, bequeathed to her niece – who in turn lived in the USA – a property occupied in Munich. None of the persons involved, neither deceased nor niece, had an ordinary residence in Germany. An unlimited inheritance and gift tax obligation is therefore excluded.

The transfer was made by legacy, so that the actual full heir was obliged to give the property transferred to him as part of the inheritance to the niece of the deceased (§§ 1939 and 2147 sentence 1 BGB).

In the further course, specifically in 2013, the deceased. The legacy took effect and her niece acquired the right to the property's surrender by the heir. She claimed this in the following year, 2014. The heir then transferred the bequeathed co-ownership share to the legatee by notarized and thus legally valid contract (§ 311b (1) sentence 1 BGB).

In 2015, the legatee prepared her estate tax return for 2014. In the following decision, the legacy was valued with the (proportional) common value of the property and taxed, reduced by the applicable allowance of EUR 20,000. The tax office established a limited inheritance tax liability within the meaning of § 2 (1) no. 3 ErbStG in conjunction with § 121 (2) BewG (domestic real estate).

The legatee appealed against the estate tax ruling. It justified it by the absence of the conditions for a limited inheritance tax liability. Both the deceased and her niece had their residence abroad at the time of death. In the absence of habitual residence, there could in no case be an unlimited inheritance tax liability. In addition, there was no domestic assets within the meaning of § 121 BewG.

Since the relevant periods of § 2 (1) no. 2 ErbStG were also exceeded, only a limited tax liability under § 2 (1) no. 3 ErbStG could be considered. Although the tax office correctly recognized this, it interpreted the concept of “domestic assets” under § 121 BewG too broadly. The list of the standard is exhaustive and explicitly includes only domestic real estate itself, but not the right to transfer such an asset. In this respect, purely through the legacy, no domestic assets existed; A limited tax liability is excluded.

The tax office rejected the objection with an objection decision according to § 367 (1) sentence 1 and (2) sentence 3 AO. It argued that entitlements to the transfer of domestic assets also constituted domestic assets. The legatee brought an action before the Finance Court (FG).

The lawsuit was also unsuccessful. The FG acknowledged that the entitlement to the transfer of real estate was a ‘right’ and not original domestic assets. In execution of the legacy, however, the transfer of the co-ownership share to domestic assets takes place within the meaning of § 121 no. 2 BewG. In an interpretation in accordance with the will of the legislature when the standard was introduced, the entitlement to the transfer of a domestic property should also be regarded as domestic property.

As a result, the action was dismissed as admissible but unfounded (§ 65 (1) sentence 3 FGO; FG Munich, 10.07.2019, 4 K 174/16). The plaintiff decided to file the appeal to the Bundesfinanzhof.

The Bundesfinanzhof allowed the revision of the niece because of the fundamental importance of the tax case. In the final judgment, he rejected the decisions of the tax office and tax court. He found that the bequest and the claim of the plaintiff acquired by it did not fulfil any of the conditions of § 2 (1) no. 3 ErbStG. The Court stated in substance that: