MOVING AWAY & INHERITANCE TAX
Leaving Germany does not always lead to the desired result – never paying taxes in Germany again.
In today’s article, the focus is on moving away and inheritance tax or gift tax!
Many people who leave Germany also do so for inheritance or gift tax reasons. This is because other countries do not levy inheritance tax, and in some cases also no gift tax (e.g. Austria). Moving away from Germany can therefore definitely be worthwhile.
In order to achieve the desired tax effect, however, there are a few special features to consider.
Overview
REQUIREMENTS FOR INHERITANCE TAX
The following are relevant for a German inheritance tax liability
- The persons involved: the person transferring assets (testator, donor) and the person who is to receive the assets (heir, donee)
- The domicile and nationality of the parties involved
- The location of the assets and the type of assets
In the case of unlimited tax liability, global assets are subject to taxation in Germany. In the case of limited tax liability, only so-called German assets are subject to inheritance or gift tax.
There are also extensions to these tax obligations – the so-called extended unlimited tax liability (§ Section 2 (1) no. 1 sentence 2 b) ErbStG ) and the extended limited tax liability (§ 4 AStG).
TAXATION OF GLOBAL WEALTH
THE PRINCIPLES
A German inheritance tax liability or gift tax liability exists if the testator/donor or the transferee is a resident (§ Section 2 (1) no. 1 ErbStG ).
Both the person of the testator/donor and the person of the acquirer are taken into account.
The following are considered nationals:
- Natural persons who have a domicile or habitual residence in Germany
- German nationals who have not resided abroad for more than five years without having a residence in Germany
In principle, you can avoid tax liability in Germany if you move away. However, there is an extension for German nationals.
EXTENDED UNLIMITED TAX LIABILITY
If a person with German citizenship moves away from Germany, the so-called extended unlimited tax liability applies for 5 years after moving away (§ Section 2 (1) no. 1 sentence 2 b) ErbStG ).
In this respect, there is still a German gift tax or inheritance tax liability for the global assets within 5 years of the departure.
If the heirs or donees are resident in Germany, there is also an unlimited inheritance tax liability in Germany. This is because the acquirers are German residents within the meaning of the above provision. The global assets are then also subject to German tax liability.
Tip: The departure of a party from Germany does not necessarily lead to tax exemption in Germany. It essentially depends on who inherits something or to whom something is given.
Example: Mr. and Mrs. Schmitz move away from Germany. They have German citizenship. 10 years after moving away, the couple die in a car accident and the children living in Germany inherit all their assets.
The assets are subject to inheritance tax in Germany, as the children live in Germany. The question of timing is irrelevant in the present case.
The taxation of worldwide assets can only end if both parties involved are no longer residents.
TAXATION OF DOMESTIC ASSETS
After the expiry of the 5-year “waiting period”, a gift tax or inheritance tax liability only exists for so-called German domestic assets (so-called limited tax liability § Section 2 (1) no. 3 ErbStG ).
This means that these assets remain taxable in Germany regardless of any time component.
Domestic assets within the meaning of § 121 BewG are exemplary:
- Agricultural and forestry assets in Germany
- German real estate
- Business assets in Germany
- Shares in corporations
- Inventions, utility models that are registered in a German register
- Mortgages, land charges, annuity debts and other claims or rights if they are secured by domestic real estate
- Rights of use to German assets
Example: Mr. and Mrs. Schmitz move away from Germany. After 7 years, they die in a car accident. The children living abroad inherit their assets. This includes a property located in Germany.
The parties involved are not deemed to be residents, meaning that the global assets are not subject to inheritance tax in Germany. However, there is a limited inheritance tax liability as domestic assets are transferred. A German tax return must be submitted.
EXTENDED LIMITED TAX LIABILITY
In addition to the above-mentioned limited tax liability for German domestic assets, there is another special provision to consider: the so-called extended limited inheritance tax liability.
The extended limited inheritance tax liability (§ 4 AStG) applies in the following constellations:
- Natural persons,
- who have been subject to unlimited tax liability as a German for a total of at least 5 years in the last 10 years before moving away
- are resident in a low-taxed foreign country after the move or are not resident in any foreign country
- The following companies continue to have significant economic interests in Germany
A move to a low-tax country may lead to an extension of the tax liability to the so-called extended domestic assets.
The provision covers assets whose income is not foreign income in the case of unlimited tax liability in accordance with § Section 34d EStG constitute foreign income.
Roughly speaking, this means that in addition to the items belonging to domestic assets, all other assets belonging to Germany are also included.
SUMMARY
In summary, there is an inheritance or gift tax liability in Germany
- 5 years after departure
- in addition, only for German domestic assets
- In the case of extended limited tax liability, it should be noted that additional German assets may be subject to taxation in Germany over a 10-year period.
- Irrespective of a time component, German taxation remains applicable in the case of a gift/inheritance to residents (e.g. children living in Germany)
PRACTICAL TIP
- Before moving away, a possible inheritance or gift tax liability of the parties involved should be checked in order to avoid tax disadvantages through structuring.
- Some of the tax exemptions usually granted in Germany do not apply to assets located abroad. For example, the tax exemption for the family home is only granted if it is located in Germany or in the EU/EEA. As a result, tax benefits cannot be claimed despite unlimited tax liability in Germany.
- The move may also give rise to an inheritance tax or gift tax liability abroad. If there is still a tax liability in Germany, double taxation may therefore occur. This can be avoided by means of an existing double taxation agreement or by offsetting the foreign tax in Germany.
- In addition to Germany and the country of origin, another country may be involved if the heir/beneficiary lives in another country.
Are you planning to move away and need tax advice regarding a possible inheritance or gift tax liability?
I am happy to support you in the following areas:
- Checking inheritance or gift tax liability in the event of relocation
- Design to avoid a disadvantageous inheritance or gift tax burden
- Assistance with appeals and legal actions before the tax courts in connection with inheritance and gift tax obligations
- Expert opinions on individual questions of inheritance or gift tax liability
- Support with the declaration
Please feel free to contact me!
Disclaimer
The article uses simple language for better understanding and is also abbreviated with regard to the individual conditions required by law.
This article does not constitute legal or tax advice, but is for general information purposes only. Every situation is individual, so I always recommend professional advice to avoid tax disadvantages.
Last updated June 1, 2023
