More and more people are moving abroad temporarily or permanently as part of their life planning; companies are internationalising. But what does moving away from Germany actually mean for inheritance tax? What are the tax rules and what should be taken into account, particularly with regard to asset succession? Below you will find an overview of the most important aspects.

1 Principles: The link between German inheritance tax liability and residence

In Germany, inheritance tax liability is primarily based on the place of residence ("resident") in accordance with Section 2 (1) no. 1 ErbStG. In particular, natural persons with a domicile or habitual residence in Germany and German nationals who have lived abroad for less than five years at the time of acquisition are deemed to be residents (Section 2 (1) no. 1 b ErbStG).

  • Unlimited tax liability:
    As long as the testator or the acquirer is a German national, the worldwide acquisition of assets is subject to unlimited German inheritance tax liability.
  • Limited tax liability:
    If neither the testator nor the heir is classified as a resident after moving away, only the so-called limited tax liability applies (§ 2 para. 1 no. 3, § 121 BewG), i.e. only domestic assets within the meaning of § 121 BewG are subject to German inheritance tax. § Section 121 BewG.

2. the "five-year rule" for German citizenship

Even after moving away, Germans remain taxable as "residents" for inheritance tax purposes for up to five years after relocating abroad (Section 2 (1) no. 1 b ErbStG).
Attention: In the case of relocation to certain low-tax countries (within the meaning of the Foreign Tax Act), this period is even extended to ten years.

3. implications for succession planning

a) Decedent's departure:
If the deceased moves away with German nationality and dies within 5 (or 10) years of moving away, the entire worldwide estate is subject to German inheritance tax.

b) Departure of the acquirer (heir):
The acquirer with German citizenship is also to be treated as a resident for 5 (or 10) years after moving away from Germany. If they inherit within this period, their worldwide acquisition is also taxable.

c) departure of both parties:
If neither the testator nor the acquirer is a resident of Germany, limited tax liability applies. Only certain domestic assets, in particular real estate in Germany, are subject to German inheritance tax. This means that if the assets consist mainly of German "assets", it is hardly worth moving away from an inheritance tax point of view; the situation is different for capital assets. The composition of the assets should therefore also be considered. In principle, arrangements can be examined to structurally remove the German assets from the scope of application of the limited inheritance tax liability. Please do not hesitate to contact us.  

4 Practical consequences and design considerations

  • An early departure of all parties involved (testator and acquirer) can avoid or reduce German inheritance tax if the estate consists mainly of foreign assets and 5 or 10 years have elapsed since moving away.
  • In the case of limited tax liability, the extent to which personal allowances, tax brackets and material tax exemptions can be utilised must be checked.
  • Double taxation is possible if the country of destination also imposes inheritance tax. Double taxation agreements only exist with a few countries (e.g. USA, France, Switzerland).
  • For company shares, real estate and international asset structures, foreign inheritance tax law and any foreign legal forms (trusts/foundations) should always be taken into account.

5. risk of double taxation & crediting of foreign taxes

If the inheritance is taxed in Germany and the new country of residence at the same time, this results in double taxation. According to § 21 ErbStG or the relevant DTA, the foreign tax can be credited or waived in certain cases - usually only with sufficient proof and application.

Conclusion

Moving away from Germany brings with it numerous inheritance tax implications - from the five-year (or ten-year) deadline to the scope of limited tax liability and the threat of double taxation. Wealthy private individuals and entrepreneurial families in particular should work with specialised advisors to develop preventative succession planning that is tailored to their individual circumstances in order to avoid tax surprises and secure their assets for the next generation.

Note

Of course, income tax issues also need to be clarified in exit cases - for example, the ill-considered inheritance of a German corporation to a non-resident taxpayer can trigger exit taxation in accordance with section 6 AStG. The question of inheritance law must also be considered. It may be necessary to draw up a will in accordance with the law of the country of departure. Matrimonial and family law issues also need to be clarified. Finally, social security is important.

Do you have questions about specific cases or international succession issues? Feel free to contact us - as your advisor for international tax succession planning, we will support you with customised solutions. Yours TAXGATE Team supports wealthy private individuals and family businesses with complex tax issues and represents their interests vis-à-vis the tax authorities.