German will

Section 27 of the German Inheritance and Gift Tax Act Doesn’t Violate EU Law

Timely and accurate estate planning may protect clients from double taxation

A recent European Court of Justice (ECJ) ruling considered whether the German Inheritance and Gift Tax Act (GIGT Act) violates European Union law by denying the consideration of inheritance tax paid in another EU Member State when assessing the inheritance tax to be paid in Germany on the same property inherited for the second time. On March 17, 2016, the Advocate General in Max-Heinz Feilen v. Finanzamt Fulda (C-123/15) ruled that the relevant GIGT Act provision doesn’t restrict the free movement of capital.

Relevant Provision

If the same property was subject to German inheritance tax for the second time within a timeframe of 10 years, Section 27 of the GIGT Act provides for a tax reduction on the second inheritance provided certain requirements regarding the relationship between the heir and the deceased are met.

Underlying Court Case

In the underlying court case, prior to the taxpayer’s mother’s death, the mother was living in Austria with her daughter. The daughter predeceased the mother and left her an inheritance while the mother was still living in Austria. Because the mother was living in Austria at the time of the daughter’s death, the inheritance was taxable only in Austria. The mother later moved back to Germany, where she passed away. The taxpayer was the mother’s only heir, and her estate consisted of the inheritance received from the daughter. Because the mother was living in Germany at the time of her death, the inheritance was subject to German inheritance tax. The taxpayer requested that the inheritance tax triggered in Germany on his mother’s estate be reduced by the amount of inheritance tax paid in Austria. The local tax office denied this claim, and the Fiscal Court confirmed the denial. The taxpayer appealed this decision before the Federal Fiscal Court, which then referred the question to the ECJ of whether the relevant provision of the GIGT Act granting such relief only in relation to the prior German inheritance taxes is in conformity with EU law.

German Provision Doesn't Restrict Free Movement of Capital

The Advocate General opined that the succession at issue falls within the scope of the free movement of capital. However, the respective provision under the GIGT Act doesn’t restrict this fundamental freedom because the difference in treatment under this provision concerns situations which aren’t objectively comparable. As already decided by the ECJ, the decisive criterion for determining whether domestic situations and cross-border situations are comparable is whether the Member State in question has a right to tax in both situations. In the present case, Germany had no right to tax the first inheritance. Only Austria had the right to tax it, as the country where the mother was resident and died. For the second inheritance, Germany was entitled to levy inheritance tax because the mother died in Germany. Because it had no right to tax the first inheritance, Germany denied an inheritance tax reduction for the second inheritance. If it had been allowed to tax the first inheritance, for example because it included German situs assets, Germany would have been granted corresponding tax relief. Denying tax relief because initially no German tax was levied on foreign property doesn’t result in a more favorable inheritance tax treatment for German property than for foreign property. Furthermore, the Advocate General opined that even if the ECJ concludes the restriction of free movement of capital, such restriction is justified by an overriding consideration of the public interest, the coherence of the German tax system and the need to ensure a balanced allocation of rights of taxation.

Consequences

The Advocate General confirmed the view of the Federal Fiscal Court that Section 27 of the GIGT Act doesn’t violate EU law. It’s expected that the ECJ will follow this ruling. Thus, taxpayers in comparable situations have to expect a double taxation with foreign and German inheritance tax for inheritances that occur several times within a short period of time. However, timely and accurate tax planning may prevent such double taxation.

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