Germany: What is subject to inheritance tax or gift tax?
The legal basis is the German Inheritance and Gift Tax Act dated 27.02.1997 (ErbStG). The taxation is linked to the enrichment of the acquirer, which is why it is described as inheritance tax. According to § 1 ErbStG, the following are subject to inheritance tax or gift tax:
- Inherited acquisitions
- Inter vivos gifts
- Assets of a family foundation within a time period of 30 years
- Specific-purpose transfers
We would be pleased to provide you with a short overview of inheritance tax and gift tax.
1. Tax liability
As with income tax and corporation tax, a distinction is also made between unrestricted and limited tax liability in respect of inheritance tax and gift tax. A specific feature of inheritance tax and gift tax law is that both the status of the deceased (donor) and the heir (donee) must be observed.
a) Personal unlimited tax liability
In accordance with § 2 para. 1, clause 1, no. 1 ErbStG, a tax liability arises if the deceased/donor or acquirer is a resident of Germany at the time of death or execution of the donation. Residents are deemed to be people who have a registered office or domicile in Germany, or are habitually resident in Germany, as well as German nationals who have spent less than five years abroad. On the basis of the principle of universal assets, all assets are subject to German inheritance and gift tax if the deceased/donor is a resident. If it is only the acquirer who is a resident of Germany, they are only subject to the part of the German tax attributable to them. In the case of unrestricted tax liability, §§ 16 and 17 ErbStG (tax allowances) and § 21 ErbStG (tax credits) apply.
b) Limited tax liability
Limited tax liability in accordance with § 2, para 1, no. 3 ErbStG occurs when neither the deceased/donor, nor the acquirer, are residents at the time at which the tax liability arises, but the transfer of assets concerns certain domestic assets. The domestic assets in question are listed in full in § 121 BewG, and these include domestic agricultural and forestry assets, real estate holdings, or business assets. Only the relevant domestic assets are then subject to German tax; an allowance of €2,000.00 in accordance with § 16 para. 2 ErbStG is granted. There are special circumstances for citizens of the EU and of the EEA. In certain cases, it may be beneficial to submit an application to impose unlimited tax liability in accordance with § 2 para 3 ErbStG. Tax allowances as per §§ 16 and 17 ErbStG can then be granted, as is the case with unrestricted tax liability, and it is possible to recognise any foreign inheritance or gift tax that has already been paid pursuant to § 21 ErbStG. Furthermore, the provisions of § 4 AStG stipulates that an extended limited tax liability applies within a period of five to ten years following a person’s move to a low tax area.
2. Tax calculations
Tax is generally calculated using the normal (market) value of the transferred assets. Various special provisions (e.g. for real estate holdings) are used. After the deduction of any tax allowances and exemptions, you can determine the taxable earnings. Based on the personal relationship between the deceased/donor and the acquirer, one of three tax brackets will then be applied; the tax rate can then be determined by reference to the amount of the earnings.
a) Tax exemptions
In principle, the entire estate is subject to inheritance and gift tax. Various tax exemptions are provided for in §§ 13 – 13c ErbStG (e.g. household goods or similar up to a certain amount). A property used by the deceased for their own residential purposes is tax free, pursuant to § 13, para 1, no. 4c ErbStG, if the property is then also used by the children of the deceased for their own residential purposes. It should be noted that there are special treatments for agricultural and forestry assets, as well as business assets.
b) Tax brackets
Based on the degree of relationship between the deceased/donor and the acquirer, the following tax brackets are determined:
Tax bracket I: spouse, life partner, children and stepchildren, descendants of children and stepchildren, parents and ancestors at the time of death
Tax bracket II: parents and ancestors, insofar as they do not fall under tax bracket I, siblings, first-degree descendants of siblings, step-parents, children-in-law, mother and father in-laws, divorced spouses and former life partners
Tax bracket III: all other acquirers
c) Tax allowances
Pursuant to § 16 ErbStG. the following are granted an exemption:
- Spouses and life partners: €500,000.00
- Children in tax bracket I and children of deceased children: €400,000.00
- Grandchildren: €200,000.00
- Other people in tax bracket I: €100,000.00
- People in tax bracket II: €20,000.00
- People in tax bracket III: €20,000.00
In the event of death, a surviving spouse is entitled to a non-taxable allowance on benefits (Versorgungsfreibetrag) pursuant to § 17, para. 1 ErbStG in the amount of €256,000.00, while surviving children, depending on their age, receive between €52,000.00 and €10,300.00 (§ 17 para. 2 ErbStG).
d) Tax rates
On the basis of the tax brackets and the amount of the taxable earnings, a certain percentage of the earnings will be charged according to § 19, para 1 ErbStG. This varies from 7% up to 50%. In relation to tax bracket I, a tax rate of 7% is used for up to €75,000.00; for taxable earnings of more than €26 million, the tax rate is 30%. From the outset, people falling under tax bracket III are subject to a tax rate of 30%, which rises to 50% from €13 million.
3. Our consulting services
Inheritance tax and gift tax can mean having to sensitively intervene in family assets. Our expert lawyers and tax advisors at Viehbacher law firm will not only complete inheritance tax and gift tax declarations, but will advise you in advance and in the long-term with regard to the optimum structure of asset transfers. Do you have any questions? We look forward to hearing from you!
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