Ruling of the European Court of Justice on Inheritance Law

iapa-conference-london-june-2012_150pxOne of the topics of the Annual General Meeting of the IAPA International Association of Professional Advisers on 25 and 26 May 2011 in London was

Ruling of ECJ on Inheritance Tax

Inheritance and gift tax systems are less harmonised in the EU then other tax laws. This often leads to double taxation in cross-border cases. The EU commission describes in its recommendation of 15 December 2011 various reasons for double taxation scenarios. National tax systems of foreign relief of inheritance taxes have in general limitations. And there is a very limited network of double taxation treaties or no regulations in EU law.

The only protection against double taxation is provided by EU freedom rights of the EU treaty. Prohibited are discriminating measures by EU-member states. Not allowed is also legislation or other legal measures of a member state to restrict EU-freedom rights. There is a wide range of ruling of the European Court of Justice (ECJ) concerning taxation of cross-border transactions but only a limited number of rulings regarding inheritance and gift tax. The ruling of ECJ on inheritance and gift tax is based predominately on the violation of the Freedom to transfer capital. Other freedom rights such as the Right of establishment or Freedom of employees do not play a major role in the court’s ruling.

The ECJ is verifying a violation of EU law always in three steps:

  • Did the transfer of capital take place?
  • Was there a restriction of a free transfer of capital?
  • Is there a justification for a restriction imposed by a member state?

The ECJ considers inheritances, legacies, gifts and foundations always as a capital transfer in this respect. Excluded are only cases where a transaction does not have a cross-border connection. A restriction requires that a non-resident is treated less favourably than a resident in a comparable situation or vice versa, or a citizen of another state is treated less favourably than an own citizen in a comparable situation or vice versa. Important is that the situation is comparable based on objective criteria. But the court ruled that negative tax effects of activities abroad alone do not necessary result in a restriction of freedom rights. Reasons for restricting measures by member states can be the Consistency of tax systems, Measures against tax fraud and tax evasion or the Efficiency of tax collection. In recent rulings the ECJ developed as a new reason the Principle of balanced allocation of power to tax between member states. But the restricting measures must meet certain criteria set by the court. Restricting legal measures by member states often do not meet these criteria.

In recent years there were a few cases on inheritance a gift tax

  • Courts case van Hilden – van der Heijden (ECJ 23/02/2006 – C – 513/03): Dutch inheritance tax on citizens for a period of 10 years after leaving the Netherlands and taking residence in Switzerland is in line with EU law.
  • Court case Jäger (ECJ 17/01/2008 – C 256/06): It is not in line with EU law if Germany imposes different regulations on the valuation of domestic and foreign property (real estate).
  • Court case Arens-Sikken (ECJ 11/09/2008 – C – 43/07): It is not in line with EU law if the Netherlands do not allow a deduction of compensation payments to other heirs as estate debt if the deduction is disallowed only for non-residents.
  • Court case Block (ECJ 12/02/2009 – 67/08): A double taxation is in line with EU law if Spain taxes an estate because cash funds and bonds are deposited at a Spanish bank and Germany taxes the same estate because the descendent was resident in Germany at the time of death. Germany was not obliged to credit the Spanish tax against the German tax.
  • Court case Mattner (ECJ 22/04/2010 – C – 510/08): It is not in line with EU law if Germany grants a lower personal threshold for non-residents than for residents.

The court case Block seems curious. The court ruled that the Freedom to transfer capital is not restricted. But obviously the German regulation is meant to restrict a free capital transfer abroad. It seems that this ruling was a political decision. And one can understand the court’s problem. Which member state is breeching EU freedom rights: Germany or Spain or both?

There is no clear outline in the EU which member state has to avoid or minimise double taxation burdens. But the consequence is that one member state alone is not allowed to breech EU law. But two or more member states together can do it without any negative consequences.

Now the problem of double taxation in inheritance and gift tax law has been addressed by the EU commission in its recommendation dated 15 December 2011. The commission states very clearly that double taxation concerning inheritance or gift tax is not supporting the smooth functioning of the internal market. Revenues from inheritance and gift tax especially from trans-border transactions represent a relatively small share of overall tax revenue of member states while double taxation have a major impact in individuals affected. The commission recommends an EU-system which allows avoiding double taxation scenarios. Whether this recommendation has an impact on the ruling of the ECJ remains to been seen.

Another uncertainty is whether cases with connection to non-member states will be protected by EU law. This is due to the fact that the Freedom to transfer capital is not restricted to the EU. In theory also citizens or residents of non-member states are protected by Article 63 EU treaty. And also property outside of the EU might be protected. The ECJ will be able to clarify whether the Freedom to transfer capital will also be applicable in cases with connection to non-member states. The Bundesfinanzof (highest German fiscal court / BFH 15/12/2010, II R 63/09) asked the ECJ whether business property situated in Canada can be valued for inheritance tax reasons at a higher level than property situated in Germany.

Unclear is also whether Swiss citizens can claim the same rights as EU citizens based on the non-discrimination clause of the Agreement of free movement and settlement between Switzerland and the EU.

Author: Peter Scheller Hamburg

Scientific Co-operation in International Tax Law

Tax law is a field of scientific research. And there are co-operations of universities from different countries. On 4 March 2011 the second Joint Seminar of the following universities will take place in Hamburg :

  • University of Hamburg (Course of studies: Master of International Taxation)
  • Universita die Roma Sapienza (Course of studies: Master in Pianificazione Tributaria Internazionale)
  • Guardia di Finanza – Corso Superiore die Polizia Tributaria

The seminar will cover the following topics:

  • Transparancy and Exchange of Information with “Tax havens”
    • The legal Framework for Exchange of Information
    • Domestic Measures against the improper use of tax havens
  • The Domestic Legislation against Tax Havens
    • Constitutional , EU and International Framework of Mutual Assistance in Tax Matters
    • The Single Instruments (New Rules and Critical Issues)

Co-ordinators are the professors Gerrit Frotscher and Pietro Selicato.

Speakers from the IAPA are involved and will cover the following topic:

Domestic Measures against the improper use of tax havens

Living and working in Germany: Trusts of expatriates can cause havoc

After World War II Germany became an immigrant country. Today more than 10 million people of Germany’s population are immigrants or second generation children of immigrants. Immigration has also its tax impacts.

A special tax problem occurs quite often with individuals form the USA or Anglo-Saxon countries when they come to live in Germany. Quite a few of them are beneficiaries of trusts.  The German tax regime of trusts is very unfavourable. This is due to two facts.

Germany’s civil law does not know this legal form. Therefore there exists uncertainty about the legal status of trusts. The second reason for the unfavourable taxation is the fact that German individuals tried to avoid high German tax burdens in the sixties and seventies of the last century by setting up trust in tax havens. This resulted in a punishing anti-avoidance tax legislation. Unfortunately German tax law does not distinguish between Germans who try to avoid taxes and foreigners coming to Germany. Trusts which have been set-up to benefit the latter were often not constructed to avoid taxation. Or if so this was legally accepted by their domestic tax system.

The tax regime of a trust in Germany depends mainly on its legal structure. If the settlor or a beneficiary is the beneficial owner of trust’s funds the trust will be treated as transparent for tax purposes. The high fiscal court of Germany (Bundesfinanzhof / BFH) ruled in a case regarding a Liechtenstein Stiftung as follows. In this case the settlor was able to control the trust. He had the right to appoint or remove trustees and to transfer all funds back to him or to third parties. The BFH classified the Liechtenstein Stiftung as transparent. The same tax treatment shall apply for trusts.

The tax situation of beneficiaries of transparent trusts being resident in Germany is as follows:

  • The beneficiary’s part of trust income will be subject to German income taxation if not denied by a double taxation treaty. Especially dividends, interests and other income from capital funds are subject to German taxation. Business or rental income might be tax free under provisions of the respective double taxation treaty.
  • Transfers of funds of the beneficiary to the trust or repayments to the beneficiary will not be subject to German income or inheritance and gift tax.
  • A serious problem can be the crediting of foreign taxes at source. This can apply for instance if the trust receives dividends from foreign sources and the foreign country imposes a withholding tax on these dividends. German tax regulations or provisions of the respective double taxation may deny the full crediting of the withholding tax on German income tax.

A beneficiary of an in-transparent trust might face far more severe tax implications if being resident in Germany. This especially applies for irrevocable trusts. The following tax implications might follow:

  • The transfer of funds to the trust by the settlor or beneficiary is subject to German gift tax. The very unfavourable tax class III is applicable (low allowances, tax rates between 30% and 50% on transferred funds).
  • Payments of the trust to the beneficiary who is resident in Germany can be subject to German income taxation under certain circumstances. And all payments of the trust will be subject to German gift tax. This extensive tax regime might result in a double taxation if payments are subject to German income and gift tax.
  • And the above mentioned problem of crediting foreign withholding taxes against German income tax is even more severe.
  • There are special provisions for so called family trusts. But in general they are not applicable for beneficiaries coming from abroad.
  • Double taxation treaties might provide a certain support against extensive double taxation. This is especially the case where German double taxation treaties with countries from the Anglo-American world have special provisions regarding the taxation of trust. But there is little support in regards to inheritance and gift tax since Germany’s only double taxation treaty in this respect has been agreed with the USA.
  • Citizens of EU-member states such as Great Britain or Ireland might be able to seek help in front of German courts if they are subject to extensive taxation. The German regulations might not be in line with European freedom rights.

Author: Peter Scheller, Somann & Scheller,

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