In the case of a foreign bequest, according to a ruling by the Federal Fiscal Court on November 23, 2022, no inheritance tax may be due (Ref. II R 37/19).
When real estate is bequeathed, inheritance tax is usually due. However, according to the ruling of the Federal Fiscal Court, a legal loophole can be used to avoid the accrual of inheritance tax, explains the commercial law firm MTR Legal Rechtsanwälte, which advises its national and international clientele on inheritance law and issues of inheritance tax.
According to the decision of the BFH, properties located in Germany can be bequeathed tax-free if the testator assigns them to the beneficiary through a foreign bequest. The condition, however, is that both the testator and the beneficiary have their residence abroad.
This was the case in the proceedings before the BFH. The testatrix had lived in Switzerland until her death in 2013 and bequeathed a property in Munich to her niece living in the USA. The bequest was fulfilled in 2014, and the niece was registered as the owner in the land register. The responsible tax office demanded inheritance tax for the acquisition of the property.
The niece opposed this and argued that due to her residence abroad and consequently limited tax liability, she owed no inheritance tax.
Her lawsuit was successful before the BFH. If a testator living abroad bequeaths real estate in Germany to a person also living abroad, no inheritance tax is due for the beneficiary in Germany. In such a case, only limited tax liability applies. Inheritance tax is then only to be paid for the acquisition of ownership of certain statutory assets. Although domestic real estate is among these assets, they remain exceptionally tax-free if the property is bequeathed to the beneficiary through a testamentary bequest of the testator, according to the BFH. The reason is that through a bequest, it is not the real estate itself but only the claim to the transfer of ownership of this real estate that is obtained, further explained the BFH.
It is different if the domestic real estate passes to the foreign heir through the statutory succession upon the death of the foreign testator. In that case, German inheritance tax is due, according to the BFH.
At MTR Legal, attorneys experienced in inheritance law provide counsel.
