German Federal Fiscal Court: no limited inheritance tax liability in case of an acquisition of a domestic real estate by bequest

The German Federal Fiscal Court (Bundesfinanzhof, BFH) ruled on 23 November 2022 that real estate located in Germany can be transferred tax-free by way of foreign bequest if neither the testator nor the beneficiary have their domicile or habitual residence in Germany. In the case of German nationals, an additional prerequisite is that they already gave up their domicile or habitual residence in Germany over five years ago. 

In the case in dispute, the testator, who died in 2013, bequeathed a share in a property in Munich to her niece. Both lived abroad and had no domicile or habitual residence in the Federal Republic of Germany. By notarised agreement, a corresponding co-ownership share in the property was transferred to the niece in 2014 in fulfilment of the bequest. A dispute arose with the tax office as to whether the acquisition of the real estate was subject to inheritance tax. The action brought by the niece before the fiscal court (Finanzgericht, FG) has now been successful.

Contrary to the opinion of the lower court (FG Munich dated 10 July 2019 - 4 K 174/16), the BFH ruled that the claim to the transfer of the co-ownership share in the domestic real estate acquired by bequest is not subject to inheritance tax. In justification of its decision, the BFH essentially stated that the conditions for a limited inheritance tax liability pursuant to Sec. 2 (1) No. 3 sentence 1 of the German Inheritance and Gift Tax Act (Erbschaft- und Schenkungssteuergesetz, ErbStG) were not met in this case.

Foreign heirs and legatees as well as German nationals who have lived abroad permanently for at least five years without having their domicile or habitual residence in Germany are only subject to limited tax liability in Germany. In this case, an inheritance tax liability exists exclusively for the acquisition of ownership of certain assets of the domestic estate within the meaning of Sec. 121 of the German Valuation Act (Bewertungsgesetz, BewG). In principle, this also includes domestic real estate. However, this real estate must be the object of the acquisition. If, under the applicable law, there is only a claim under the law of obligations to the transfer of domestic real property, this is not sufficient as the object of the acquisition. 

The BFH's decision impressively shows that, especially in situations with a foreign connection, it can be well worth your while to consider taxes in your succession planning.  This is due to the fact that, while inheritance tax would be incurred in the case of a simple inheritance of real estate, it may not be triggered in the case of a bequest, as the case shows.

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Jan Mohrmann

Jan Mohrmann

PartnerAttorneyCertified Tax AdviserGraduate in Financial Economics (FH)

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