§ 29 ErbStG leads to the expiry of the inheritance tax and gift tax. The most important case is that of § 29 (1) no. 1 ErbStG. Accordingly, the gift tax expires upon return of the gift. We explain the conditions for this and what you need to pay particular attention to.

1. expiration of gift tax

§ 29 ErbStG leads to the expiry of the inheritance tax and gift tax with effect for the past. The cases in which the tax expires are listed enumeratively.

Practically, the regulation has a considerable importance. The reason for this is that it makes it possible to reverse grants with tax effect (§ 29 (1) no. 1 ErbStG). Furthermore, § 29 (1) no. 3 ErbStG allows the expiry of a gift tax arising between spouses. Spouses often misunderstand the character of the property regime of the community of profit as a separation of property with final compensation for profit. Rather, they interpret the legal property regime of the community of gain as one of the community of goods. Therefore, they are regularly not aware that grants among them constitute free grants within the meaning of § 7 (1) no. 1 ErbStG and thus trigger gift tax. However, the provisions of § 29 (1) no. 2 and no. 4 ErbStG have rather little practical relevance.

2. applicability: final origin of the tax necessary

The expiry of the inheritance tax and gift tax presupposes first that this has finally arisen according to § 9 ErbStG. If the tax has not yet been finally incurred, a donation can still be corrected, so that the effect of § 29 ErbStG does not matter at all. In some cases, however, the tax has not yet arisen.

For example, only the abandonment and registration permit is necessary for the gift execution in the case of a property gift. There is therefore an advance shift to the registration permit. However, this only applies if registration then actually takes place. Therefore, in the case of a property gift, the tax origination can ultimately be prevented until the property transfer. If the registration is not made, the gift tax is not incurred. Then it is no longer important to § 29 paragraph 1 number 1 ErbStG. This also applies to the acquisition of death, for example, if there is still a possibility of revocation. In these cases, § 29 ErbStG is therefore not applicable due to the lack of definitive origin of the inheritance tax or gift tax. Only if the tax has been definitively incurred are the requirements of § 29 (1) ErbStG decisive for the question of whether the tax is still to be raised.

3. return of the gift (§ 29 paragraph 1 no. 1 ErbStG)

3.1. Events covered: Gift return

§ 29 (1) no. 1 ErbStG opens up the possibility of expiration of the tax if a gift has to be returned due to a right of recovery. Then the first question arises which processes are covered by the term “gift”, so that a return of the “gift” would extinguish the gift tax.

The term “gift” includes acquisitions within the meaning of § 7 ErbStG. Therefore, gifts on death, the transfer to a foundation (§ 7 (1) number 8 ErbStG) or a trust (§ 7 (1) number 9 ErbStG) are also covered by the scope of application.

In the case of donation to the death, however, it must be differentiated whether the reversal takes place before or after the death of the donor. If the gift on the death before the death of the donor is wound back, the tax has not yet arisen due to the occurrence of the condition of death. Therefore, the gift can be reversed without application of § 29 (1) no. 1 ErbStG tax-neutral. However, if the death of the donor has occurred, § 29 (1) no. 1 ErbStG shall apply.

3.2 Existence of a right of recovery

The gift tax expires pursuant to § 29 (1) no. 1 ErbStG in cases where the gift is to be issued due to a right of recovery. This requires that a right of recovery exists, it is exercised, so that the gift does not remain with the recipient. Consumption is not a return. The voluntary return as a result of a merely moral or moral obligation is, however, not sufficient for § 29 (1) no. 1 ErbStG. It therefore leads to a return, which in turn is subject to taxation.

The taxable person bears the burden of determination and proof for the right of recovery. The requirements for a return, however, must be set out and proven by the tax authority. However, if the taxable person is unable to provide proof of a right of recovery, this shall lead to a taxable return. As a result, gift tax is again payable on the transaction.

If creditors of recovery and debtors of recovery doubt whether the conditions for the right of recovery exist, they can clarify this by means of binding information or an effective understanding. This is recommended because the conditions for the right of recovery are often not beyond doubt. Especially if the reversal is based on the disruption of the business basis (§ 313 BGB), there are regularly considerable proof difficulties and legal uncertainties.

3.3. Return of the gift due to legal right of recovery

The right of recovery may result from law. For example, the regulations for contesting, non-execution of an obligation or revocation of a gift for serious misconduct or gross ingratitude according to § 531 paragraph 2 BGB should be considered.

The tax expires even if the surrender must be made to a third party. This applies, for example, in the case of the compulsory shareholder’s claim against the gifted person (§ 2329 BGB), the claim of the contract heir in the case of an impairing donation (§ 2287 BGB) or the claim of the contractually considered legatee in the case of an impairing donation. The Bundesfinanzhof (BFH) has expressly confirmed this in the event that the claim of a subsequent heir is directed against the gifted person because of a disposition of the previous heir within the meaning of § 2113 BGB that affects this. However, he has also generally stated that § 29 (1) no. 1 ErbStG also applies to third-party publication claims. It is not necessary that the gift is returned to the donor, but only that it is not left to the gifted person.

3.4.Right of return also in case of value replacement obligation?

The claim can also be based on value substitutes instead of the delivery of the gift object. Then the question arises whether the tax can also be extinguished under § 29 (1) no. 1 ErbStG. Such a case exists, for example, if the spouse entitled to compensation pursuant to § 1390 (1) sentence 1 BGB can claim a third party for reimbursement of the value of a free grant of the spouse liable for compensation to the third party. The third party can avert this claim according to § 1390 (1) sentence 3 BGB by issuing the received.

But even if the value substitute claim is averted, the primary claim remains directed to value substitute. The person obliged to pay has only a mere right to avert the payment entitlement with the surrender. Then there is no obligation for him to give it. However, such an obligation is necessary according to the wording of § 29 (1) no. 1 ErbStG. Therefore, in the case of the substitute value, the tax does not itself expire if it can be averted by restitution of what has been obtained.

3.5. Return of the gift due to contractual right of recovery

Since the wording does not contain any restriction, in addition to statutory recovery rights, contractual recovery rights also belong to the collected recovery rights. The right of recovery must be granted to the donor. The agreement of a free right of withdrawal does not in principle preclude the execution of the donation within the meaning of § 9 (1) no. 2 ErbStG. However, the retroactive waiver of recovery does not constitute a grant within the meaning of § 7 (1) no. 1 ErbStG.

Problems arise when gifting co-entrepreneur shares. The free right of withdrawal leads to the gifted person not becoming a co-contractor within the meaning of § 15 (1) no. 2 ErbStG. Therefore, the company benefits are not applicable due to the link in § 13b (1) no. 2 ErbStG.

This problem does not arise, however, in the donation of share capital. In view of § 13 (1) no. 3 ErbStG, only the transfer of civil property is decisive there.

In such cases, however, the further tax consequences that the stay of the economic property with the donor must always be observed. Here, for example, the exit tax is to be considered if the donor moves away after the gift. Therefore, not only the donation execution within the meaning of § 9 (1) no. 2 ErbStG must be observed. Rather, if a free right of withdrawal is desired. We must also consider the other tax consequences. Of course, this also applies if the reasons for recovery are formulated in such a way that they grant a free right of withdrawal as a result. For this reason, the reasons for recovery should be formulated in such a way that they presuppose a (mis)behaviour of the recipient or an event outside the sphere of design of the donor.

3.6. Subsequent agreement of the right of recovery?

After completion of the donation, the right of recovery can no longer be agreed. Therefore, from this point onwards, a reversal with the tax effect of § 29 (1) no. 1 ErbStG can only take place on the basis of a statutory right of recovery. If there is no statutory right of recovery, the return processing again leads to a taxable return.

3.6. Return of the gift due to dissolving condition

The legal consequence of § 29 (1) no. 1 ErbStG also occurs if a dissolving condition is contained in the gift contract and the event occurs. If not only the gift contract is under a dissolving condition, but also the real transaction, the object of the gift automatically falls back to the donor. According to the wording of § 29 (1) no. 1 ErbStG it is necessary that the gift must be issued on the basis of a right of recovery. However, the regulation must be effective even more if the rewinding takes place automatically due to a resolving condition.

3.7. Agreement of an ex-post fee

In order to avoid a gift, a fee could also be agreed subsequently, so that the transaction is converted into a purchase contract. Then, in the view of the Federal Court of Justice (BGH), a free legal transaction becomes a paid legal transaction. This applies even if the gift agreement was not subject to the condition that the agreed legal ground can subsequently be replaced by another legal ground.

However, it is assessed differently whether this also applies to the gift tax, with the result that this would then be eliminated. According to the BFH, however, for example, the payment of a usufruct right for remuneration does not lead to the original free-of-charge transaction becoming a free-of-charge transaction. There is no factual connection for a retroactive event within the meaning of § 175 (1) sentence 1 no. 2 AO. It can therefore be assumed that the subsequent agreement of a fee leads to a taxable return, unless the gift agreement contains the reservation to exchange the legal ground subsequently.

3.8. Return of the gift to a third party

Even if the object of gift is to be given to a third party, § 29 (1) no. 1 ErbStG still applies. However, the delivery to the third party then leads to a free allocation of the donor to the third party.

4.Notes on the design of the contractual right of recovery

There is a lot to consider when designing the contractual recovery rights. It is important to ensure that the recovery clause is formulated with sufficient precision, but not too narrowly. A precise wording makes it easier for the taxpayer to prove compliance with the criteria vis-à-vis the tax office. It should also be possible to exercise the right of recovery indefinitely as far as possible.

Precaution should also be taken in case of confusion. Confusion arises, for example, if the donor reserves a right of recovery in the event of the pre-dying of the recipient, but the donor is the only heir of the recipient. In this case, the right of recovery should already be exercised in anticipation in the gift contract.

On the other hand, it is possible to include a contractual right of recovery in the contract for the reversal of the original donation. This should then make it possible to reclaim the gift if the conditions for the repayment of the original gift do not exist, i.e. the tax effect of § 29 (1) no. 1 ErbStG does not occur with regard to the original gift. Thus, it is possible to carry out at least the reversal of the return with the tax effect of § 29 (1) no. 1 ErbStG.

5th recovery of the gift in international circumstances

A donation can also have been made internationally. Then, before agreeing on a right of recovery, it must always be checked whether, under the national tax law of the other state, a contractual reservation of withdrawal leads to the gift being deemed not to have been completed. This is important, for example, if US tax law is to be observed on the basis of the donor’s US nationality. According to US tax law – unlike German law – a donation in the case of agreement of withdrawal rights has not taken place. Then it certainly does not depend on the expiry of the gift tax.

Furthermore, it must be clarified whether the German provisions are to be examined at all with regard to the conditions of the existence of a claim for recovery or whether foreign provisions are relevant. In these cases, it is advisable in terms of design to provide for contractual recovery rights, provided that this does not prevent the execution of the gift. You should also insert a choice of law clause in the gift contract.