The internationalization of companies and the resulting worldwide mobility of their shareholders/partners, as well as managing directors, have led to binational marriages or dual citizenships, which have rather become the rule than an exception.
Furthermore, as a result of increasing mobility of capital and people, assets such as shares in corporations, interests in partnerships, real estates, agricultural and forestry and businesses, patents/licenses etc. are often spread over a multitude of jurisdictions.
Based on the globalization of assets and people, different jurisdictions become “part of the game” , both from a legal and tax perspective. Consequently, cross-border succession and estate planning requires a high level of advice. Otherwise, double taxation is likely to occur or, in the worst case, legally not realizable succession concepts, due to a lack of incompatibility of the jurisdictions involved.
In a not insignificant number of cases mobility of people can result in a residence/domicile in more than one jurisdiction. As a result, the worldwide accrual of assets is subject to inheritance or estate tax in two or even more tax regimes. In these cases, conventions for the avoidance of double tax in the field of inheritance of estate tax rarely apply so that double taxation is often inevitable, e.g. due to different valuation principles, tax exemptions, tax allowances or divergent interpretations of the law.
Furthermore, assets spread over different countries (e.g. a vacation home in the United States of America, a directly held interest in German commercial partnership or even bank accounts) may trigger limited tax liability, respectively. Also in these cases, a risk of double taxation exists since the requirement of the term “foreign assets” might differ between the different jurisdictions involved.
Crediting of the foreign taxes can also fail in practice if it does not correspond to the domestic tax: For example, capital gains taxes (amongst others Canada, Israel) or capital return taxes (Austria) may not creditable to inheritance or gift tax (e.g. in Germany) and even income taxes.
Furthermore, it should be paid attention that a planned stay abroad may lead to unplanned inheritance and estate tax consequences: If the heir is considered to be resident of the country assigned to and therefore unlimited inheritance or estate tax liability applies, the assignment will quickly become an “expensive” undertaking.
But not only from an inheritance or estate tax perspective, but also from an income tax perspective the increasing mobility of people and capital can trigger negative tax implications: If the heir or donee is a resident of another jurisdiction, the transfer of assets can also be subject to exit taxation since the jurisdiction of the deceased or donor is not entitled to tax the respective assets anymore, e.g. due to a Convention for the Avoidance of Double Taxation. Consequently, the difference between fair market value and accounting value is to be taxed even if no supply of cash occurs.
Additionally, the incompatibility of jurisdictions can lead to legally not realizable succession concepts and, therefore, existential threats for businesses caused by excessive taxation: As an example, civil law countries such as e.g. Germany do not usually accept transfers of assets to trusts – a common succession planning tool in Anglo-Saxon countries like the United States of America or the United Kingdom.
Furthermore, in many jurisdictions the taxation of estates is currently “in the spotlight”: The steadily increasing concentration of wealth in the developed countries as well as the empty coffers of many governments due to extensive public spending caused by the financial crisis create a growing claim for higher taxes on inheritances and estates. Moreover, many of the biggest fortunes in the world will the transferred to the next generation within the next ten years.
Based on these developments, increasing demands have been placed on legal professions in recent years: International gifts and events of succession require a cross-border collaboration of the respective advisors of the client in order to jointly ensure optimal estate planning and administration of estates. Moreover, the exchange of information and thus the knowledge of the tax authorities on an international level is further proceeding, as the introduction of the Common Reporting Standards (CRS) in multiple countries since January 1, 2017, impressively demonstrated.
From the perspective of international succession advice, it is therefore indispensable to develop at least a basic understanding of the respective foreign tax system in order to implement an optimal (tax) succession plan. However, in practice, it is often observable that local advisors frequently lack direct access to according information and that language barriers also exist.
Consequently, this website sheds light on the field of German Inheritance and Gift Tax by discussing the most recent developments with a focus on the following sections:
• case law (decisions of the finance courts),
• ministry of finance (statements, regulations etc.)
• journals (articles from tax magazines)
• hot topics (practical issues in a nutshell)
In this context, valuable practical advice is given to avoid common tax pitfalls. This is especially relevant to international succession planning practitioners advising clients with residence or habitual abode in Germany or holding domestic German assets such as interests in commercial partnerships, shares in corporations, German real property, silent partnerships, inventions or utility patents. Moreover, it is relevant to the owners of family businesses and private companies, managers of private capital enterprises, executives of multinational companies and other mobile high-net-worth individuals.