In its decision of 27.08.2020 (Case No. II B 39/20 (AdV)), the Federal Fiscal Court (BFH) has again affirmed that great-grandchildren—unlike grandchildren—are not included in the privileged group of beneficiaries under tax class I No. 2 of § 15 para. 1 ErbStG for the purposes of gift tax. The decision addresses an issue of increasing practical significance amid rising asset transfers and provides clarity concerning the tax treatment of direct and more remote descendants.
Background and Legal Framework
Gift tax in Germany primarily bases the level of taxation on the degree of kinship between donor and recipient. The legislator generally distinguishes between various tax classes, which determine both allowances and tax rates. According to § 15 para. 1 ErbStG, tax class I includes, in particular, children, stepchildren, and grandchildren of the donor. Enhanced allowances and reduced tax rates apply to these privileged recipients.
Given the social realities of multi-generational families and intergenerational wealth transfers, there has been repeated discussion in the past as to whether great-grandchildren should also be included in this group of tax beneficiaries—such as when the parental generation is already deceased or when asset transfers are made across generations during the donor’s lifetime.
The specific dispute
In the case to be decided, it concerned the transfer of assets to great-grandchildren, where the plaintiffs demanded the application of tax class I No. 2, as applicable for grandchildren. They particularly argued the intent and purpose of the provision, namely to provide tax relief for the extended family. Due to the lack of explicit mention of great-grandchildren in the law, they claimed there was an unintended gap which should be closed through teleological interpretation. The BFH clearly rejected this with well-founded reasoning.
Reasoning of the Federal Fiscal Court
Clear statutory framework
The BFH first emphasizes the plain wording and systematic interpretation of the law. Great-grandchildren are explicitly not mentioned in § 15 para. 1 ErbStG. Instead, the legislator, through deliberate and definitive regulation, has indicated the groups of people intended to be privileged. An extension of this group cannot be inferred from the substantive scope of the statute and must not be made through judicial development of the law.
No unintended loophole
Where an unintended incompleteness is assumed, the BFH points to the legislative materials and the structure of the inheritance and gift tax act. Equal treatment of great-grandchildren, whether due to successive generations or family policy reasons, was known to the legislator but was deliberately not implemented. The explicit mention of children and grandchildren in the tax privilege therefore excludes great-grandchildren from the relevant group of beneficiaries.
Reverting to tax class II
As they are not assigned to the privileged persons, great-grandchildren fall under tax class II, with correspondingly lower allowances and higher tax rates. Thus, access to favorable tax conditions within the framework of the gift tax is not legally available to this group of recipients.
Significance for Families, Succession Planning, and Asset Transfers
Especially in the context of intergenerational asset transfers, the ruling is of particular practical importance. For both business and personal succession and transfer arrangements, the tax treatment of gifts to great-grandchildren is now clearly established. An indirect benefit by circumventing the tax class arrangement is excluded.
Even reference to family policy or economic considerations, such as in response to demographic changes or to promote intra-family asset flows, remains without effect on the tax assessment in light of the clear legal situation.
Note on ongoing developments
It is up to the legislator to explicitly regulate any future changes towards expanded privileges. Until such an amendment is made, the current principles apply. Those affected should closely follow ongoing legal developments and any legislative changes.
Conclusion
The BFH’s decision underscores that tax privileges within the framework of gift tax are determined by the clear wording and structure of the law. For great-grandchildren, unlike grandchildren, there are no direct tax advantages according to tax class I No. 2 ErbStG. The transfer of wealth to future generations therefore requires careful tax planning and consideration of the applicable provisions.
Should further questions arise in connection with gift tax or asset transfers to subsequent generations, the lawyers at MTR Legal can provide advisory support both nationally and internationally.
