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Inheritance and Gifting of Real Estate in Germany: Tax Advantages for Third Countries Too

ECJ abolishes EU/EEA area condition

Inheritance and Gifting of Real Estate in Germany: Tax Advantages for Third Countries Too

When rented apartments and buildings are transferred to the next generation through a gift or inheritance, the German tax authorities provide preferential tax treatment. Previously, this required that the property in question is situated in the EU or EEA. The European Court of Justice (ECJ) has now dismissed this condition, citing the free movement of capital guaranteed under European law.

Tax advantages for family homes and rented properties

Inheritance or gift tax is frequently due on properties that are bequeathed or gifted. The German legislature supports certain scenarios in this regard. For instance, the so-called family home can, under specific conditions, be transferred tax-free to the spouse or, upon death, to the children of the deceased.

Property rented to third parties for residential use also receives tax advantages upon transfer, although to a significantly lesser extent than the family home. Specifically, 10 percent of the property value is not taxed in the event of a transfer by inheritance or gift, as the property is recognized at 90 percent of its value. However, a significant limitation is that the property in question must be located in the European Union (EU) or the European Economic Area (EEA) (Section 13d (3) No. 2 ErbStG or, in the old version of the law submitted to the ECJ, Section 13c (3) No. 2 ErbStG).

Tax valuation of property inheritance

An heir who had previously inherited an apartment building in Canada challenged this in proceedings before the Cologne Fiscal Court. The tax court, in turn, referred the matter to the ECJ as part of a so-called preliminary ruling procedure. The tax court questioned whether the statutory restriction to the EU/EEA area contradicts the free movement of capital under European law.

The ECJ concluded that the differential tax assessment of the property based on whether it is located in the EU/EEA or in a third country infringes the free movement of capital (ECJ of October 12, 2023, C-670/21). The ECJ was unable to identify a sufficient justification for this infringement, even though the German tax authorities had endeavored to objectively justify the restriction to the EU/EEA area in corresponding submissions.

Legislators and the BMF must respond

The ECJ’s ruling should now provide concrete reasons for the legislature to implement improvements, as the current version of Section 13d para. 3 no. 2 ErbStG violates – higher-ranking – (European) law. Due to the ECJ ruling, it can also be assumed that this does not only apply to the disputed situation with Canada, but also to a number of other third country scenarios. Until the law is revised, the tax authorities are generally required to apply the standard unchanged. However, there may be a relevant directive from the Federal Ministry of Finance (BMF) to proceed differently.

WINHELLER reviews your situation with properties in third countries

In the current situation, it is generally advisable to thoroughly examine corresponding assessment, inheritance and gift tax notices that are based on comparable circumstances involving real estate in third countries and to file an appeal as a precautionary measure – with reference to the ECJ’s decision.
We will be pleased to assist you in reviewing the legal situation and taking the necessary steps. Feel free to contact us with your queries!

Continue reading:
Optimizing Taxation in Germany with Investment GmbH/Asset Management GmbH

Elmar Krüsmann

Attorney Elmar Krüsmann specializes in advising nonprofit organizations, foundations and high-net-worth individuals. He often handles affairs with cross-border implications.

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