Tax & Legal

Inheritance tax is currently receiving increased attention. The discussion is being shaped by both legal questions and an increasingly lively political debate. Particular focus is being directed towards the various proceedings that have been pending before the Federal Constitutional Court for several years.

According to a decision of the Supreme Tax Court, the 5-year preferential period in Section 35b sentence 1 of the German Income Tax Act starts at the time the inheritance tax arises, which is generally upon the death of the testator. This also applies if it was not possible to claim the tax reduction in due time by reasons for which the taxpayer could not be held responsible.

If spouses set up a bequest in the form of a so-called Berlin will (Berliner Testament) for children who do not claim their compulsory portion upon the death of the first deceased, the surviving spouse as the heir of the first deceased cannot deduct the bequest as a liability, as the bequest is not yet due. In a recent ruling, the Supreme Tax Court also held, that the child as successive heir must pay inheritance tax on the final legacy as it originates upon the death of the surviving spouse.

In a case of the sale of property belonging to the estate of an association of co-heirs the Supreme Tax Court held that the acquisition for consideration of a joint shareholding is not equivalent to the direct pro rata acquisition of the inherited assets themselves. With this most recent judgment the Supreme Tax Court abandons its previous case law on the matter.

When evaluating inheritance transactions with cross-border implications, a distinction must be made between inheritance law and inheritance tax law. Inheritance transactions subject to foreign inheritance law may also be subject to inheritance tax in Germany. Such a case was decided by the Supreme Tax Court in a situation where the beneficiary was resident in Germany whilst her deceased father was an Italian citizen and resident there.

According to the Supreme Tax Court in its judgment of 11 July 2019 – (II R 38/16), published on 28 November 2019, the inheritance tax exemption on the inheritance a family home by the surviving spouse or civil partner will not apply retroactively where the surviving spouse/partner transfers ownership of the family home to a third party within ten years of acquisition.

In this issue: PwC Reports, Official Pronouncements, Supreme Tax Court Cases, From Europe and From PwC

The Constitutional Court has rejected for lack of prospects for success a case claiming that the future income tax due from the heir on interest earned but not yet due on the date of death of the testator be deducted from the inheritance tax base as a charge on the estate.

The Constitutional Court has held the exemption of business assets from inheritance and gift tax to be unconstitutional as it is too broad-based. However, the present rules continue in force for a temporary period.

The ECJ has held that the higher inheritance and gift tax allowances due to residents should also be granted on capital transfers between non-residents where at least one of the parties is resident in an EU member state.

The ECJ has held that the principle of freedom of capital movement precludes the German system of granting higher personal allowances on capital transfers where at least one of the parties is resident.

An ECJ advocate general has suggested the court extend its earlier rulings against lower personal allowances to heirs in other member states to residents in third countries.

The Supreme Tax Court has held that an asset transfer on death is chargeable to inheritance tax under German law, even though its basis was a foreign legal act without an exact German parallel but leading to exemption in the foreign state of residence of both parties.

An ECJ advocate general has suggested the court deny an individual freedom of capital movement on the grounds that the more appropriate freedom is that of establishment, which, however, is not relevant in the circumstances.

The Supreme Tax Court has referred to the ECJ on a refusal to grant the same inheritance tax allowance on a holding in Canada that would have been available on a domestic investment.