Inheritance and gift tax Germany: all you need to know
Inheritances and gifts with a foreign link are becoming more common, including implications on inheritance and gift tax in Germany.
This occurs when someone involved in the process resides in another country. Transferring assets in a different country can also cause this to happen. For example, this could include a vacation property in Spain.
Transferring assets can lead to inheritance and gift taxes in multiple countries. This means that individuals must meet tax obligations in different countries.
When does German inheritance law apply?
German inheritance tax law applies to both inheritance and gift tax (Gift Tax Act), if certain conditions are met:
- (a) unlimited,
- (b) extended unlimited, or
- (c) limited inheritance or gift tax liability in accordance with the Inheritance Tax Act.
Unlimited inheritance and gift tax liability
If the donor or beneficiary is a German resident at the time of the tax event, the entire transfer of assets is subject to unlimited gift tax liability. At least one party needs to be a resident in Germany, either by having a domicile or habitual residence there.
A dwelling could also be a holiday house or a holiday flat (secondary home). In contrast to some other countries, a residence can also exist in Germany if the donor or beneficiary has stayed in the country for less than 180 days. Habitual residence requires an uninterrupted stay of 6 months in Germany, possibly over two calendar years.
Prolonged unlimited liability for inheritance and gift tax
German citizens who have not been away from Germany for over five years are liable to prolonged unlimited tax. An extension to ten years is stipulated by the Foreign Tax Act for specific assets if the German citizen resides in a low-tax country (income tax) or does not have residency in any foreign land (digital nomads).
This rule applies indefinitely for German citizens who earn salaries from a local fund (staff of embassies, members of the German military, etc.) and their family members with German nationality residing in the same household.
Limited inheritance and gift tax liability
Anyone who does not have resident status is liable to pay gift tax on their domestic assets.
Home-based assets encompass
- Property assets (property, land, inherited leases)
- Commercial assets (individual business, partnership shares (GbR, OHG, KG), permanent offices, permanent representatives)
- To be a shareholder, you must own at least 10% of shares in a German corporation (GmbH, UG or AG). Additionally, the corporation must have its base or management in Germany.
- German books or registers register inventions, utility models, and topographies.
- A domestic business transfers assets (rental, leasing).
- Obtained guarantees through domestic property or vessels listed in the German ship registry.
- If the debtor is in Germany, it is possible to recover money from loans or partnerships involving silent partners.
- possesses usage rights to one of the aforementioned properties
Dual taxation in global inheritance scenarios
In situations where foreign assets are taxed by the overseas nation and there is an unrestricted gift tax obligation in Germany as well, Germany will offset the foreign gift tax unless there’s a different provision in a double taxation treaty for gift tax.
The procedure of counterbalancing overseas tax is more complex than it first appears. It begins with determining if the foreign tax is indeed a gift tax; for instance, some nations impose capital gains tax and registration charges. Delays can also lead to the loss of the chance to offset the foreign tax.
In contrast to income taxes, there are only six inheritance tax double taxation agreements that contain bilateral double taxation rules, namely with Denmark, France, Greece, Sweden, Switzerland and the USA.
When do I need to report an inheritance and gift to the tax authorities?
In Germany, you must inform the tax office within 3 months of learning about inheritances or gifts. Exeption to this are transfers that are subject to notarization in Germany, e.g. property transfers. In the latter, the notary will inform the tax office about the transaction.
How much inheritance and gift tax applies in Germany (tax free gift limit Germany)?
The amount of how much money can you gift in Germany tax-free (tax free gift allowance Germany) depends on the family relationship between the donor and the beneficiary. This also applies for inheritances.
Tax Class I
- the spouse and the life partner, 2. the children and stepchildren, 3. the descendants of the children and stepchildren mentioned in number 2, 4. the parents and previous parents in the case of acquisitions by reason of death.
Tax Class II
- Parents and previous parents, unless they belong to Tax Class I, 2. the siblings, 3. First-degree descendants of siblings, 4. the stepparents, 5. Children-in-law, 6. the parents-in-law, 7. The divorced spouse and the partner of a dissolved civil partnership.
Tax Class III
All other purchasers and the special-purpose allocations.
Tax exemptions on inheritance and gift tax
The German Inheritance Act allows for considering a number of tax exemptions, including but not limited to:
- Business assets (up to 85% exempt)
- Real estate (family home) continously used by the widow or children
- Household goods (upt to 41,000 Euros)
Each of the above mentioned cases must meet certain criteria.
Tax free inheritance and gift limit in Germany
In case of unlimited tax liability, the following tax free gift limits apply:
- Spouse and life partner (Tax Class I): 500,000 Euros
- Children (Tax Class I): 400,000 Euros
- Grandchildren (Tax Class II): 200,000 Euros
- Other individuals (Tax Class I): 100,000 Euros
- Other individuals (Tax Classes II and III) in the amount of 20,000 Euros
Taxable assets are calculated based on the following approach:
Gross assets transferred (excluding tax exemptions, where applicable)
minus liabilities related to the assets transferred
minus tax free inheritance or gift limit
The applicable tax is between 7% (Tax Class I, up to EUR 75,000 taxable assets) and 50% (Tax Class III, more than EUR 26,000,000 taxable assets).
To reduce taxes, consider inheritance or gift tax planning, but consult a tax advisor before making any decisions, e.g. transfer assets between spouses first and then to children to optimize the use of tax free limits. Multiple opportunities for tax structuring exist, but it is important to do them prior to the event.
Criminal law risks
Ignoring notification and declaration obligations can result in criminal liability. If you fail to declare your foreign assets, you could face significant tax liabilities or be held accountable for them by tax authorities indefinitely.
As one quickly reaches inheritance tax charges of over 25,000 Euro, there is a risk of severe penalties. If the tax evaded is more than 25,000 Euro, this generally constitutes large-scale tax evasion. Check out our blog post on self-declaration for Bitcoin, it can also be used for gift tax situations.
Inheritances and gifts with a foreign connection can give rise to tax obligations in several countries. Those need to be carefully reviewe because of the different types of tax obligations.
Germany has only concluded double taxation agreements with six countries in the area of inheritance and gift tax, so that double taxation in the case of unlimited tax liability takes place by offsetting the foreign tax, insofar as this is attributable to foreign assets.
The definition of foreign assets differs depending on whether the tax liability is triggered by the testator/donor or the transferee. This can result in a tax credit gap.
How s&w can support you
s&w can help you as tax advisors with inheritance and gift tax advice, including preparing inheritance and gift tax returns. s&w also assists clients with self-disclosures if they did not make tax declarations in a timely manner or incomplete declarations.
Photo: Ekaterina Shevchenko (Unsplash)
Disclaimer: We assume no liability for the accuracy and completeness of the information. The information provided here does not constitute recommendations for action.