European law report - As free as the heir
Inheritance tax is levied by governments on assets bequeathed by the deceased to their beneficiaries. Different jurisdictions have different names for this type of tax: some, for instance, dub it as estate tax, others even as death duty. Inheritance...
Inheritance tax is levied by governments on assets bequeathed by the deceased to their beneficiaries. Different jurisdictions have different names for this type of tax: some, for instance, dub it as estate tax, others even as death duty. Inheritance tax based on nationality has been held to be legal and compatible with EU law, and therefore the member states of the EU may tax the heirs of their nationals even if the deceased resided abroad at the time of death.
In a recent judgment, the European Court of Justice (ECJ) dealt with tax reliefs on inheritance tax. In this case, the Court concluded that making such relief subject to the condition that the asset acquired by inheritance be situated in the national territory constituted a restriction on the free movement of capital, contrary to EU law.
The case concerned German inheritance tax rules that taxed French agricultural and forestry land more heavily than similar land located in Germany. Mr Jäger, a French resident, inherited his mother's estate consisting of French agricultural land and forestry as well as assets in Germany. The last residence of his mother was Germany. The land was valued in France and was declared subject to inheritance tax. The German government also calculated the inheritance tax payable by Mr Jäger, both on the assets in Germany and on the agricultural and forestry land in France. The inheritance tax paid by Mr Jäger in France was then offset against the tax payable in Germany.
Mr Jäger, however, filed an objection against the calculation of the inheritance tax by the German government and the case ended up in the Tax Court of Germany.
The question arose because German law allowed a substantial reduction in the taxable value of land situated in Germany but incorporated a different, less beneficial, valuation rule for foreign land. Mr Jäger complained that German law differentiated according to the place in which the assets of his mother's estate were located, claiming that this was not reconcilable with the principle of the free movement of capital.
The German Court referred the matter to the ECJ for a preliminary ruling. The Court of Justice first noted that member states in the realm of direct taxation must act in consistency with Community law even though direct taxation falls within their exclusive competence. Moreover, the ECJ held that inheritances involve transfer of assets left by the deceased amounting to personal capital movements, and to this extent inheritances constitute a movement of capital, falling squarely within one of the four freedoms entrenched in the EU Treaty, unless the inheritance estate is confined within a single member state.
The ECJ concluded that the German tax rules subject an inheritance, consisting of agricultural land and forestry situated in another member state, to tax higher than that which would be payable if the assets inherited were situated exclusively within German territory. This was declared by the Court to have the effect of restricting the movement of capital by reducing the value of an inheritance consisting of such an asset situated outside Germany. Indeed, the German discriminatory tax measures had the effect of making investments in property located outside Germany less attractive to German investors. The German government did not demonstrate a need for such a discriminatory treatment on the grounds of public policy. In these circumstances, the ECJ declared the German tax rules to be incompatible with EU law.
• Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.
In a recent judgment, the European Court of Justice (ECJ) dealt with tax reliefs on inheritance tax. In this case, the Court concluded that making such relief subject to the condition that the asset acquired by inheritance be situated in the national territory constituted a restriction on the free movement of capital, contrary to EU law.
The case concerned German inheritance tax rules that taxed French agricultural and forestry land more heavily than similar land located in Germany. Mr Jäger, a French resident, inherited his mother's estate consisting of French agricultural land and forestry as well as assets in Germany. The last residence of his mother was Germany. The land was valued in France and was declared subject to inheritance tax. The German government also calculated the inheritance tax payable by Mr Jäger, both on the assets in Germany and on the agricultural and forestry land in France. The inheritance tax paid by Mr Jäger in France was then offset against the tax payable in Germany.
Mr Jäger, however, filed an objection against the calculation of the inheritance tax by the German government and the case ended up in the Tax Court of Germany.
The question arose because German law allowed a substantial reduction in the taxable value of land situated in Germany but incorporated a different, less beneficial, valuation rule for foreign land. Mr Jäger complained that German law differentiated according to the place in which the assets of his mother's estate were located, claiming that this was not reconcilable with the principle of the free movement of capital.
The German Court referred the matter to the ECJ for a preliminary ruling. The Court of Justice first noted that member states in the realm of direct taxation must act in consistency with Community law even though direct taxation falls within their exclusive competence. Moreover, the ECJ held that inheritances involve transfer of assets left by the deceased amounting to personal capital movements, and to this extent inheritances constitute a movement of capital, falling squarely within one of the four freedoms entrenched in the EU Treaty, unless the inheritance estate is confined within a single member state.
The ECJ concluded that the German tax rules subject an inheritance, consisting of agricultural land and forestry situated in another member state, to tax higher than that which would be payable if the assets inherited were situated exclusively within German territory. This was declared by the Court to have the effect of restricting the movement of capital by reducing the value of an inheritance consisting of such an asset situated outside Germany. Indeed, the German discriminatory tax measures had the effect of making investments in property located outside Germany less attractive to German investors. The German government did not demonstrate a need for such a discriminatory treatment on the grounds of public policy. In these circumstances, the ECJ declared the German tax rules to be incompatible with EU law.
• Dr Grech is an associate with Guido de Marco & Associates and heads its European law division.