In consideration of European Court of Justice law, the German Supreme Tax Court has ruled in favour of a Swiss-resident widow and granted the full higher tax-free allowance for spouses of EUR 500,000 irrespective of the total inheritance transferred which also included foreign property not subject to German tax.
As stated by PwC in a note, the European Court of Justice (ECJ) has previously held that the German inheritance and gift tax option according to which a higher exempt amount is available where one beneficiary is resident does not fully resolve the conflict with EU law arising from the lower personal allowances for non-residents.
German inheritance tax personal allowances vary by degree of kinship between EUR 500,000 (spouses) and EUR 20,000 (unrelated persons), with this allowance dropping to EUR 2,000 regardless of kinship in all cases where both testator (donor) and heir (beneficiary) are not resident in Germany.
A Swiss-resident widow objected to this distinction in respect of her inheritance of a Germany property along with certain other Swiss assets from her deceased Swiss-resident husband. The widow inherited German property of circa EUR 377,000, Swiss property of EUR 5,200,000 and Swiss bank deposits and investments in Switzerland of EUR 1,100,000 in 2010.
The German tax office initially assessed the inheritance tax on the value of the German property by taking into account the lower personal allowance of EUR 2,000 but then reversed its decision in light of the judgment of 17 October 2013, in which the ECJ held that the principle of freedom of capital movement prohibits the German system of granting higher personal allowances on capital transfers where at least one of the parties is resident.
However, in its amended assessment, the tax office reduced the tax in part by granting the higher tax-free allowance for spouses only proportionally, i. e. in the ratio of the German property to the total assets inherited (including the Swiss assets). This treatment was now also rejected by the Supreme Tax Court. The higher tax free allowance must be granted in full and the inheritance of German property was thus tax free altogether.
In 2011, the German tax administration introduced in the Inheritance and Gift Tax Act an option for taxation as a resident. Regardless, the ECJ – in a judgement on 8 June 2016 – held that the inheritance and gift tax option for taxation as a resident does not fully resolve the conflict with EU law from the lower personal allowances for non-residents.
The Supreme Tax Court concluded that the higher tax-free allowance of EUR 500,000 be available in full according to the strict wording of the Inheritance and Gift Tax Act. A broader interpretation that the exemption must be granted on a pro rata basis is not justified. Any amendment to that effect would be a matter for the German legislator.
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