German Inheritance and Gift Tax for American Families

Section 2(1) number 1 ErbStG imposes tax on the whole worldwide acquisition where the decedent at death, the donor when the gift is made, or the acquirer when the tax arises, is an Inländer: a person with a dwelling or habitual abode in Germany, a German national who has not been permanently abroad for more than five years, a German national in German public service abroad, or a corporation managed or seated in Germany.

The third limb carries the practical weight. A child who has taken a job in Germany is within German inheritance tax on the whole of what she receives, including from American relatives who have never set foot in Germany. Nothing about the estate needs to be German; her residence is sufficient.

Where neither side is resident in Germany, the charge narrows to German situs assets under section 121 of the Valuation Act: German real estate, German business assets and permanent establishments, shareholdings of at least 10 per cent in German companies, German registered intellectual property, and claims secured on German land. German bank accounts and portfolio securities are not on that list, a distinction many families assume the other way round. In such cases the allowance is reduced proportionately under section 16(2) ErbStG, which the Court of Justice of the European Union held compatible with the free movement of capital in case C-394/20, while holding in the same judgment that the denial of a deduction for compulsory share claims is not.

Both the allowance and the rate follow the relationship. Two features catch American families: parents move between classes according to whether they inherit or receive a gift, and an unmarried partner is in class III whatever the duration of the relationship, which is the harshest treatment the system contains and is avoidable.

The allowance is per transferor and per acquirer, so a child with two living parents has two, and it renews every ten years under section 14 ErbStG, which aggregates acquisitions from the same person within that window. A programme of gifts spaced a decade apart multiplies the exemption, and is the most effective planning tool German law offers; it works only if the gifts are real, documented and notified.

The German figures are measured in euros against a scale beginning at 7 per cent, where the American system is one large exclusion followed by a flat rate. Concentrating everything on a spouse, efficient against the American exclusion, wastes the German allowances of the next generation. German gift tax also applies to the whole worldwide gift if either the donor or the recipient is resident in Germany, so a transfer of American securities to a daughter in Berlin is within the charge although nothing crossed a border.

Where both countries tax the same transfer, the estate and gift tax convention does not exempt. Article 11 assigns a credit and decides which country must give it, and section 21 ErbStG supplies a domestic credit where the convention does not reach, including for state inheritance taxes that correspond to the German tax. Two mechanical points decide whether a credit is worth anything: the federal estate tax must be apportioned among the beneficiaries on the Form 706 values, and payment must be proved. A credit is in any event worth the tax actually paid and no more, so an estate below the federal exclusion generates nothing to credit.

Separately from the tax, section 30 ErbStG requires every acquirer to notify the competent German tax office in writing within three months of learning of the acquisition, and imposes the same duty on the donor in gift cases. The usual exemption for acquisitions evidenced by a German court, notarial or consular document does not apply where the acquisition includes real property, business assets or foreign assets, which covers almost every German-American case. Failure to give it is the ordinary route by which an innocent cross-border transfer becomes a tax-evasion problem years later.

German inheritance and gift tax follows the person who receives, so the German exposure of an American family is determined by where its members live and how they are related to the transferor, not by where the assets are or how the estate is administered. A plan built against the American exclusion will not answer the German charge, and the allowances German law does give are forfeited by waiting.