The deduction of estate liabilities within cases of limited inheritance tax liability
ECJ forces German tax authorities to take this into account
If neither the heir nor the testator live in Germany, but domestic property located in Germany, such as real estate, is inherited, the question arises to what extent German inheritance tax is levied on this.
In these cases, there is usually a so-called limited inheritance tax liability in Germany. Here Germany does not subject the entire inheritance to German inheritance tax, only inherited domestic assets.
Case law has clarified the question of the extent to which inheritance tax allowances can be taken into account and deducted when determining the domestic inheritance subject to inheritance tax if the heir and testator are EU citizens.
The allowances under the Inheritance Tax Act are therefore taken into account as a deduction proportionate to the value of the entire inheritance in relation to the inherited domestic assets.
It had not been clarified until now to what extent obligations of the estate, such as the fulfillment of claims to a compulsory portion that were assumed by the heir, may be deducted in this situation. The German tax authorities have so far refused any deduction of estate liabilities with reference to the limited inheritance tax liability, and have isolately considered and taxed the full domestic acquisition.
The ECJ has now opposed this with its judgment of December 21, 2021. Accordingly, the principle of the free movement of capital is violated, in EU cases, if a member state allows a deduction of estate liabilities in the case of successions in which heirs or testators have their place of residence or habitual residence in its country, but refuses to do so in the case of a limited inheritance tax liability.
In the judgment mentioned, the ECJ does not comment on the extent to which the liabilities of the estate must be taken into account. Here, however, as with the consideration of inheritance tax allowances, one has to assume a pro rata deduction of the estate liabilities, based on the value of the domestic inheritance in relation to the overall estate.
As tax consultants, we, Alexia Huber & Partner Steuerberatungsgesellschaft mbB, Munich, support our clients both in advising on the tax-optimized design of cross-generational asset transfers as well as in the preparation of gift and inheritance tax returns.