Limited inheritance tax liability for foreign investors in Germany
Property and business acquisitions by foreign investors in Germany have been running at a high level for a number of years.
Investments are often handled by means of a corporate structure whose shares are held by a natural person who is neither permanently nor habitually resident in Germany. It should be clear to everyone involved that limited tax liability arises in respect of profits generated in Germany in this way.
Foreign investors are often unaware of the limited inheritance tax liability arising under Sect. 2 Para. 1 No. 3 of the Inheritance Tax Act (Erbschaftssteuergesetz – ErbStG).
This arrangement means that so-called domestic assets within the German tax system are subject to the German Inheritance Tax Act. For foreign investors this arrangement can, without doubt, become very expensive.
“Domestic assets” are principally:
• domestic land / real estate,
• domestic business assets,
• shares in domestic corporations where the investor’s direct or indirect holding accounts for at least 10% of all the shares,
• receivables secured on domestic property by means of a charge on land,
• receivables from a silent partnership or profit-participation loans granted to a domestic borrower
The consequences of limited inheritance tax liability include the fact that the only deductible debts and encumbrances are those that are financially connected to taxable domestic assets and that the personal allowance is limited to 2,000 euros. It should also be noted that it is not permitted to set the liability off against foreign inheritance tax.
In order to avoid limited inheritance tax liability in Germany, appropriate structures should be discussed and put in place at an early stage.
Limited inheritance tax liability does not apply if the taxpayer transfers his assets abroad or into a foreign corporation regarded as non-transparent under German tax law.
Ideally, the transfer should take place at the same time as the acquisition in order to prevent future income tax liabilities from arising.
Stb. Boris Reichenauer L.L.M