Private Clients Practice Tip
This practical tip explains in which constellations a gift or inheritance remains completely exempt from inheritance and gift tax, even if the acquirer or donor/decedent is resident in Germany. The Tax Court of Baden-Württemberg ruled on this in three rulings dated August 5, 2020 (file number: 7 K 2777/18, 7 K 2778/18, 7 K 2779/18).
Tax law framework
The German Inheritance and Gift Tax Act (ErbStG) contains a special feature that is often alien to similar laws in other countries. An acquisition (share in the estate or gift) is taxable not only if the donor/decedent had a residence in Germany, but also if the acquirer had a residence in Germany. Thus, as soon as there is a connection to Germany via a residence of only one party, German inheritance or gift tax may be triggered.
In addition, a domicile is quickly established. It is sufficient to have a place to stay that can be visited at any time. According to German law, it does not have to be the center of life; a room with relatives that can be used at any time is also sufficient.
It is obvious that, due to these low-threshold connections, there is quickly a risk of double taxation in situations involving two countries. Even if the two-country relationship exists only in the person of the donor, i.e. if the donor is resident in Germany and has his center of life abroad, there is a risk of double taxation - in Germany because of the residence, and abroad because of the center of life. Where the donee lives or has his center of life in this case is irrelevant.
In the aforementioned case, so-called double taxation agreements (DTAs) counteract double taxation. These bilateral treaties under international law determine which state is actually entitled to the right of taxation in the aforementioned constellations. This is achieved by determining where a person (donor/decedent) is resident for tax purposes on the basis of certain factual requirements. If a DTA exists, then the double state reference does not trigger double taxation.
In the field of inheritance and gift tax, however, there are only a few double taxation agreements, namely with:
Sweden (no longer has inheritance and gift tax itself)
Austria (no longer has inheritance and gift tax itself; the DTA was terminated and has been out of force since January 1, 2008)
Switzerland (for all inheritance cases and for gifts of business interests)
Three siblings brought an action before the Baden-Württemberg Tax Court. Their father had donated shares in a Swedish stock corporation to them in 2005. At the time of the gift, it was undisputed that he had a residence in Germany as well as a domicile and his center of life in Sweden. The donated siblings had no connection whatsoever with Germany, and in particular did not even have a residence in Germany.
The question was whether, due to the donor's residence in Germany, there was a right of taxation in Germany and therefore gift tax was due in Germany.
The Tax Court of Baden-Württemberg ruled that Sweden alone was entitled to the right of taxation, even if gift tax had been abolished in Sweden at the time of the gift. In the event that a donor is domiciled in Germany and Sweden, it is his center of life that is decisive for the gift tax if a double taxation agreement exists. This also applies if Sweden had already abolished gift tax at the time of the gift and there is therefore no taxation. Two special features in the relationship with Sweden had to be taken into account: The DTA does not have a subject-to-tax clause that would have secured Germany's right of taxation if Sweden did not exercise itss. - The DTA was not terminated - unlike in the relationship with Austria - although the gift tax was abolished in Sweden.
The judgments are not legally binding. The appeals before the Federal Fiscal Court (Bundesfinanzhof, BFH) are pending under file numbers II R 27/20, II R 28/20 and II R 29/20.
The judgments are correct. In cases with reference to Sweden, a full tax exemptionbe achieved. Since an adjustment of the DTA (introduction of a subject-to-tax clause) is unlikely, it is to be feared that the DTA will soon be unilaterally terminated by Germany.
In the constellations concerned - gifts as well as inheritance cases - similar cases should be handled by Objection be kept open.
To a limited extent, the unambiguous legal situation is also likely to actively used can be made in order to make gifts tax-free. However, it must then be expected that the question of where the center of life exists will be intensively examined by the tax office. It is important to have the situation thoroughly checked in advance and to ensure proper documentation.
Overall, it will have to be observed whether the tax law assessment made by the Fiscal Court can be transferred to other double taxation agreements and opens up further areas of application. Should a Wealth tax are introduced in Germany, the question could increasingly arise. Germany will not hastily terminate the existing double taxation agreements in the field of wealth tax or will even reactivate DTAs because they also concern wealth tax in addition to inheritance and gift tax.