Many Canadians with German roots or Germans residing in Canada experience it at some point: a family member in Germany passes away – and suddenly an inheritance appears. Whether it’s a bank account, a condo / house or shares in a company – the inheritance raises tax issues. Under German inheritance tax law, there may be an obligation to pay inheritance tax in Germany – even for heirs residing abroad.
- Tax liability despite residence in Canada: When is German inheritance tax applicable?
German inheritance tax is regulated in the Inheritance Tax Act (ErbStG). German inheritance tax applies without restriction, i.e. to the entire worldwide assets acquired through the inheritance (unlimited tax liability in Germany) if, for example
- the testator or the heir was a resident in Germany at the time of death or
- the heir is a German citizen and has lived in Germany within the last 5 years prior to the inheritance.
In cases where there is no unlimited tax liability in Germany, the so-called limited tax liability in Germany may apply. This may be the case if neither the testator nor the heir lives in Germany. This limited tax liability provides for certain assets to exist in Germany (so-called domestic assets). This includes, for instance, real estate owned in Germany and associated rights, shares in companies in Germany, agricultural and forestry assets in Germany. If such domestic assets exist, taxation is limited to these assets in Germany.
However, money in bank accounts in Germany or valuables such as jewelry do not fall under domestic assets and are not subject to limited tax liability.
- What is taxed – and how is the value of the inheritance determined?
German inheritance tax is based on the value of the assets that are passed to the heir at the time of inheritance. Special valuation rules may apply, which may differ significantly from the market value or Canadian valuation standards. There is a separate law for determining the value of assets, the Valuation Act (BewG). In many cases, the taxable value determined this way is lower than the actual market value, which can reduce the tax charge for heirs. A value determined by the authorities can be challenged under certain circumstances – for example by means of a private expert opinion if the actual circumstances differ.
- How high is the tax – and what tax allowances apply?
German inheritance tax is based on a progressive system: The higher the value of the taxable inheritance, the higher the tax rate (7% – 50%). There is also a special characteristic in Germany: the tax rate also depends on how close the relationship is between the testator and the heir. Therefore, the children of a testator usually pay a lower tax rate than the niece would have to pay.
Furthermore, there may be allowances of a certain amount. The amount of the allowance again depends on the relationship to the testator and whether the inheritance is subject to unlimited or limited tax liability.
- How and when do I have to declare and pay inheritance tax in Germany?
Even if you live in Canada, you are obliged to cooperate if a German tax liability applies. Heirs living abroad should know which deadlines and obligations exist towards the German tax authorities – and which mistakes they should avoid.
Initially, the heir must notify the responsible German tax office in writing of the inheritance within three months of becoming aware of the inheritance. The tax authorities of the federal states provide forms for this purpose. It is not sufficient to wait for a notification from the German (tax) authorities regarding the inheritance. The notification is an independent obligation of the heir. Which tax office is responsible depends on the circumstances of the individual case. If the testator lived in Germany, the tax office at the testator’s place of residence is usually responsible. If both the testator and the heir are not residents of Germany, the tax office in whose district (the most valuable part) of the testator’s assets are located is usually responsible.
After receiving the notification, the tax office will ask questions or decide directly whether an inheritance tax declarationis required. For heirs living in Canada, it is often easier to do this through a German tax advisor or lawyer. All taxable assets, allowances and any liabilities are then listed in the tax declaration.
Once the tax office has reviewed the declaration, an inheritance tax notice of assessment is issued in which the tax office determines the relevant calculation basis and the amount of inheritance tax to be paid. Inheritance tax is normally payable within one month.
If the heir forgets to notify the tax office or submits the notification too late, this can result in a disadvantageous estimate by the tax office, criminal proceedings for tax evasion and considerable interest charges. Heirs should therefore have the inheritance checked at an early stage, even if they are not sure whether there is a tax liability at all. If in doubt, a precautionary notification to the tax office is the better choice.
- Tax optimization through early consultation
If the succession is planned in good time before the testator’s death, beneficiaries and heirs can benefit from allowances and the subsequent tax burden can be reduced.
- Conclusion
When having family or business connections to Germany, German inheritance tax law is an often-underestimated aspect. Even though Canada itself does not charge inheritance tax the way as Germany does, an inheritance with a German connection can result in unexpected tax obligations – especially in the case of real estate or larger assets in Germany.
We at SNP Canada Ltd. provide expert advice on all tax issues relating to cross-border German inheritance cases. Contact us – we will be happy to advise you.
The Application of Acquisition of Declaration – Another Path to German Citizenship?
The Fourth Amendment to the Nationality Act, which came into force on 20.08.2021, creates a ten-year right of declaration that gives children born after 23.05.1949 to a German parent the opportunity to obtain German citizenship by means of a simple declaration. The new regulation now gives those entitled to make a declaration the opportunity to submit the declaration to the competent German authority until August 19, 2031.
The Federal Office of Administration (BVA) is the competent citizenship authority for persons who have their habitual residence abroad. This means that only the BVA can make a final statement on the existence or non-existence of German citizenship. All applications to acquire German citizenship by declaration are submitted to the BVA via the embassies or consulates general, where a decision is then made.
The reason for the new amendment to the law coming into force is to remedy the gender-specific discrimination in the Citizenship Act of 1913, which remained in place even after the Constitution came into force. The unequal treatment of cases and the gender-discriminatory law do not comply with the legal requirements of the Constitution. The legal basis for obtaining a declaration can be found in Section 5 of the Citizenship Act (StAG).
Groups addressed by Section 5 of the Nationality Act are children who did not automatically become German nationals because they were born in wedlock before January 1, 1975, to a German mother and a non-German father or born out of wedlock to a German father and a foreign mother. Additionally subject to the law are also children born after May 23, 1949, who lost their German nationality acquired by birth through legitimisation effected by a foreigner and valid under German law. Furthermore, children born after May 23, 1949 to a mother who lost her German citizenship through marriage to a foreigner may also be eligible applicants. The regulation also applies to descendants of those eligible to declare.
However, a person is not eligible to declare if they have previously held German nationality by birth or after losing it due to legitimate recognition by a foreigner under German law, but have subsequently renounced, lost, or rejected it, or if they were born as a descendant of such a person after its renunciation, loss, or rejection.
Finally, the birth of a child born abroad must be registered within one year if the German parent was born abroad after December 31, 1999. Otherwise, the child cannot acquire German nationality by declaration.
The application has to be submitted at the responsible German representation abroad, where it is checked for completeness before being forwarded to the Federal Office of Administration (BVA). After a positive decision, a certificate of acquisition of German citizenship is issued. This can be used to apply for a passport.
