International Inheritance and Gifts with German and Foreign Connections

As soon as the testator or donor or the heir or donee is a “resident” within the meaning of Section 2 of the German Inheritance Tax and Gift Tax Act (Erbschaftsteuergesetz, ErbStG) at the time of the inheritance/gift, the unlimited inheritance tax liability applies to the entire asset transfer. “Residents” are, for example

• natural persons with domicile or habitual residence in Germany;
• German nationals can remain subject to extended unlimited tax liability for up to five years even after moving abroad - and even up to 10 years if they move to the USA. A move abroad by a German national therefore does not immediately lead to an exclusion of the German right of taxation. 

If only the acquirer is a German national, the unlimited inheritance and gift tax liability only extends to the assets that are transferred to the German acquirer. It is then necessary to check which tax category applies and which personal allowances (Section 16 ErbStG) can be deducted.

If neither the testator nor the heir is resident in Germany, only “domestic assets” are subject to inheritance or gift tax (“limited inheritance tax liability”). This includes, for example

• domestic real estate (real estate),
• domestic business assets or
• shares in corporations (GmbH) with their registered office or management in Germany if the shareholder holds at least 10 percent of the shares.

The decisive advantage in such a case is that the other assets, which may be distributed worldwide, are not subject to German taxation.

If a German citizen moves to a low-taxed foreign country, the definition of domestic assets can also be extended in accordance with the requirements of Section 4 of the German Foreign Tax Act (Außensteuergesetz, AStG) (“extended limited inheritance tax liability”). The conditions, in particular the question of whether Section 2 AStG applies, should then be carefully examined in each individual case, as should possible arrangements to avoid the tax.

If the deceased and their heirs are resident in different countries or if there are assets in different countries, there may be a risk of double taxation with inheritance tax. In principle, Germany credits the foreign inheritance tax in the event of unlimited tax liability - in practice, however, this often leads to problems (e.g. because the foreign tax does not correspond to inheritance tax, but rather a fictitious sale of the assets is assumed, as in Canada).

DTAs in matters of inheritance can help to avoid the threat of double taxation: Either the foreign tax paid is credited or the assets located abroad are fully exempt from tax (and only taken into account for determining the tax rate).

However, Germany has only concluded such a DTA with a few countries, namely the USA, Switzerland, France, Denmark, Sweden and Greece.

But be careful: some of these DTAs only apply to inheritances (Switzerland), while others also apply to gifts (USA).