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Understanding German Inheritance Tax: A Guide for Foreign Heirs

On Behalf of | Mar 5, 2024 | Aachen, International Tax and Business Entities, Munich, Trust, Estate Planning, and Probate |

German Inheritance Tax, known as “Erbschaftsteuer,” is a crucial consideration for those who are recipients of German assets due to a person’s passing. This tax, specific to Germany, is applicable to individuals receiving inheritances, whether they are legal heirs, legatees, or other beneficiaries. By learning the vital details of the German Inheritance Tax, one can avoid unnecessary stress and ensure the most efficient transfer of assets.

Understanding the German Inheritance Tax

According to German law, when a person dies, their assets are transferred to their heir. For the inheritor, this is considered to be a form of income, and therefore taxable, just like earnings or capital gains. The tax operates as a case-specific levy, linked to the actual transfer of assets to heirs, legal inheritors, legatees, or recipients. Unlike estate tax models in other countries, it centers on assets received by the relevant heir after deducting estate obligations.

German inheritance tax is imposed on any transfer of property at death, including the following:

  • An inheritance, legacy, and/or a forced share;
  • Gift mortis causa;
  • The death benefit of a life insurance, annuity, or other contractual death benefit;
  • Transfer on death to a foundation or foreign pool of assets; and
  • Any compensation for a disclaimer of inheritance.

Regarding the potential international implications, it’s important to note that inheritance tax paid in Germany may be tax-deductible or serve as a credit in the heir’s country of residence, especially if a double taxation treaty exists between Germany and the country of residence. Germany has tax treaties with the United States, Greece, France, Sweden, Denmark, and Switzerland, which may override German domestic law under certain circumstances.

Tax Obligations

For foreign heirs in Germany, the tax liability differs between unlimited and limited inheritance tax obligations. In cases of unlimited inheritance tax obligation, the tax is subject to the total existing assets, both in and out of the country. In cases of limited inheritance tax obligation, only the assets verified within the country are taxed. Unlimited obligation arises when either the recipient or the deceased was a resident in Germany at the time of the death or gifting. Limited obligation applies when the inheritance involves assets within Germany, even if the recipient and the deceased reside in another country.

Tax Exemptions

There are several items that are exempt from the inheritance tax. These include:

  • Household goods and personal effects up to €41,000
  • Works of art, cultural assets, or items of scientific interest
  • Land ownership or part thereof
  • German-based pension plans
  • Gifts to churches or charities
  • Self-residential premises, under certain conditions

The following business assets are also eligible for tax relief:

  • Domestic agricultural and forestry assets and assets located in the EU or the EEA.
  • Domestic business assets or business assets serving a permanent establishment in an EU or EEA member state
  • Participations in domestic partnerships or in partnerships with permanent establishments in EU or EEA Member States
  • Shares in corporations with their registered office or management in Germany, a Member State of the EU or the EEA and a minimum shareholding of more than 25%.

However, it is worth noting that administrative assets are excluded from tax relief. Of the assets eligible for preferential tax treatment, 85% are tax-exempt.

Tax Brackets & Tax Rates

Recipients are categorized into one of three tax classes based on their relationship to the deceased, affecting tax rates. Exempt amounts vary depending on the relationship and circumstances, including whether the recipient has unlimited tax liability. Since January 1, 2010, these rates have been applicable to inheritance and gifting tax in Germany.

The current tax classes, their tax-free allowances, and their tax rates are as follows:

Tax Class I

  • Spouse, partner (€500,000)
  • Children and stepchildren (€400,000)
  • Descendants of these children and stepchildren (€200,000)
  • Parents and ancestors in case of receipt due to death (€100,000)

Inheritance tax rate: between 7% and 30%, depending on the value of the asset

Tax Class II

  • Siblings, descendants of siblings to the first degree (€20,000)
  • Sons and daughters-in-law, step-parents and parents-in-law (€20,000)
  • Divorced spouses and also partners from a terminated partnership (€20,000)

Inheritance tax rate: between 15% and 43%, depending on the value of the assets

Tax Class III

  • All other persons, including legal entities (€20,000)

Inheritance tax rate: 30% or 50%, depending on the value of the assets

Additionally, in case of inheritance, the surviving spouse or partner and the children are assigned a special exempt amount for their support. The exempt amounts are:

  • Spouse/partner: €256,000
  • Children aged 0–5: €52,000
  • Children aged 5–10: €41,000
  • Children aged 10–15: €30,700
  • Children aged 15–20: €20,500
  • Children aged 21–27: €10,300

There’s no difference between inheriting from a biological parent, a step-parent, or an adoptive parent. There is also a special exception for orphaned children who later inherit from a grandparent. In this case, their tax-free allowance for inheritance from their grandparents is €400,000 instead of €200,000.

Navigating German Inheritance Tax

There’s already a lot to think about when you lose a loved one, which makes dealing with practical and financial matters much more of a challenge. The situation becomes even more complicated for beneficiaries whose loved ones live in another country, as they must navigate unfamiliar laws. As such, it is important to understand the regulations and exemptions of a country’s inheritance laws. By doing the research, beneficiaries can make informed decisions and manage their inheritance efficiently.