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Germany–Switzerland · Article 9 of the treaty

Debt deductions · Mortgages · Loans

Estate debts under the Germany–Switzerland inheritance tax treaty

For cross-border estates, it is necessary to determine not only which state may tax individual assets. Debts must also be allocated to a state or category of assets under the Germany–Switzerland inheritance tax treaty. Article 9 starts with the economic connection: debts connected with a particular asset are generally deducted from the value of that asset. The agreement contains further allocation rules for other debts and any remaining excess debt.

Starting point

Debts must be allocated internationally in the same way as assets

Articles 5 to 8 of the Germany–Switzerland inheritance tax treaty first allocate taxing rights over the assets of the estate.

Article 9 supplements these rules for liabilities. Without such a provision, the two states might allocate the same debt differently, or one state might allow a deduction even though the related asset is taxed in the other state.

Article 9 therefore aims to ensure that assets and the liabilities economically connected with them are treated together wherever possible.

Overview

The basic approach of Article 9

Type of debt Allocation under the treaty Typical example
Debt economically connected with specific assets Deducted from the value of those assets Mortgage debt relating to a property
Debt of a business or permanent establishment Allocated to the relevant business assets A business loan financing a Swiss permanent establishment
Other debt not connected with a specific asset Generally deducted from assets taxed in the deceased’s state of domicile A general personal loan without a connection to particular assets
Excess debt Further allocation under the specific rules of Article 9 A mortgage exceeds the tax value of the assets to which it is allocated
Legacies The debt deduction rules apply correspondingly A cash legacy payable out of the estate

Article 9(1) of the treaty

The economic connection is the key allocation criterion

Under Article 9(1), debts economically connected with a particular asset are deducted from the value of that asset.

The identity of the creditor or the place where the loan agreement was concluded is therefore not the sole determining factor.

What matters is the asset to which the debt is economically attributable.

  • Examine the purpose of the financing
  • Document how the funds were used
  • Check the connection with real estate or a business
  • Security alone is not always decisive
  • The actual economic connection is what matters

Real estate financing

Mortgages and property-related debts

A classic application of Article 9(1) is a liability economically connected with real estate.

For example, if the deceased financed a Swiss property through borrowing, the corresponding loan is generally allocated to that Swiss property to the extent that an economic connection exists.

The same principle applies to German real estate.

Property

Property purchase

A loan taken out directly to finance the purchase price of the property.

Build

Construction costs

Financing the construction, extension or substantial renovation of a property.

Refi

Refinancing

A replacement loan may retain the economic connection with the property.

A charge over real estate does not necessarily determine the allocation

If a property is used merely as security for a loan whose proceeds were actually used for other purposes, the economic connection must be assessed separately.

Financing liabilities

Loans must be assessed by reference to how the funds were actually used

For loans, it is particularly important to establish how the borrowed funds were used.

If the funds were used to acquire, construct or finance a particular asset, this supports a direct economic allocation to that asset.

If, by contrast, the funds were used for general living expenses or private asset financing without a clearly identified asset connection, the loan may qualify as another debt governed by the further rules of Article 9.

Documentation is crucial

The loan agreement, movement of funds, purchase agreement, construction cost statements, bank records and internal financing documents may be decisive in establishing the economic connection when an inheritance occurs.

Article 9(2) of the treaty

What happens to debts with no connection to a particular asset?

Not every estate debt can be directly allocated to a property, permanent establishment or another specific asset.

Article 9(2) contains a separate rule for these other debts. They are generally deducted from the value of the assets taxed under the treaty in the deceased’s state of domicile.

This may include, in particular, other assets covered by Article 8.

Private

General personal loan

No identifiable financing of a particular asset.

Tax

Personal tax liabilities

To the extent deductible, these often cannot be directly allocated to an individual asset.

Other

Other obligations

General debts of the deceased without a specific economic connection to a particular asset.

Excess debt

What happens if the debt exceeds the value of the asset to which it is allocated?

Article 9 is not limited to the initial allocation of debts. It also governs the treatment of any remaining excess debt.

If the value of the assets to which a debt is initially allocated is insufficient to absorb the full deduction, the uncovered portion is allocated to other categories of assets under the further rules of Article 9.

This is intended to prevent an existing estate debt from losing its tax effect solely because the asset to which it is primarily allocated has a lower value.

Debts cannot be allocated freely to maximise tax savings

An estate cannot freely allocate debts to whichever state or asset produces the greatest tax advantage. The order of allocation is determined by Article 9.

Article 9(5) of the treaty

The rules also apply correspondingly to legacies

Article 9 is not limited to conventional loan or mortgage liabilities.

It expressly states that the rules on deducting debts also apply correspondingly to the deduction of legacies.

For larger cross-border estates, the specific terms of a will may therefore also affect the international allocation of the tax burden.

Estate distribution under civil law and allocation under the tax treaty must be assessed separately

The fact that a particular heir bears the economic cost of a legacy or satisfies it using a particular asset does not, without further assessment, determine its allocation under the treaty.

Interaction with German law

The treaty does not itself define the term “debts”

The inheritance tax treaty does not contain a comprehensive, independent definition of what constitutes a debt.

Where the agreement does not provide its own definition, Article 3(2) generally requires reference to the relevant domestic law.

On the German side, section 10 of the German Inheritance and Gift Tax Act (ErbStG) is particularly relevant to the deduction of estate liabilities.

Level of assessment Question
German inheritance tax law Does a tax-deductible estate liability exist in the first place?
Article 9 of the treaty To which asset or category of assets is the debt allocated internationally?
Articles 5–8 of the treaty Which state may tax the related assets?
Article 10 of the treaty How is any remaining double taxation eliminated?

Article 9 does not automatically create a new deductible debt

A relevant estate liability must first exist under the applicable domestic law. Article 9 then governs, in particular, its international allocation.

Case law

BFH II R 45/92: the economic connection is decisive

BFH, 25 October 1995 – II R 45/92

Swiss residence, German properties and loans from family members

The deceased and the heirs were German nationals. At the time of death, however, they had already been living in Switzerland for more than five years.

The estate included numerous properties located in Germany. The heirs claimed substantial loan liabilities owed by the deceased to family members as estate debts.

Germany was entitled to tax the German real estate on the basis of limited tax liability and Article 5 of the treaty.

For the deduction of debts, the German Federal Fiscal Court (BFH) relied on Article 9(1): debts may be deducted from the value of a particular asset if they are economically connected with that asset.

Since the treaty does not itself define the term “debts”, the BFH referred to domestic law through Article 3(2).

The decisive question was therefore, in particular, whether and to what extent the loan liabilities could be economically allocated to the German properties.

No income tax arm’s-length test for recognising the loan liability

The BFH also clarified that the income tax principles governing the arm’s-length assessment of loan agreements between close relatives cannot simply be transferred to the inheritance tax question of whether an estate liability exists.

The judgment does not mean that every family loan is deductible

The liability must actually exist. Allocation under Article 9 additionally requires evidence of the economic connection with the asset concerned.

Practical examples

Typical debt allocations

CH property

Swiss property with a mortgage

The mortgage directly finances the acquisition of the Swiss property. It is generally allocated to that property.

DE property

German property owned by a deceased resident of Switzerland

Germany may tax the property under Article 5. A loan liability economically connected with it is generally deducted from the property’s value under Article 9.

Private

General consumer loan

If there is no connection to a particular asset, the rule for other debts generally applies.

PE

Financing a permanent establishment

A loan used to finance a specific permanent establishment is generally allocated to the corresponding business assets.

Mixed

Loan used for several purposes

If loan proceeds are used for several assets, an appropriate apportionment may be necessary.

Legacy

Cash legacy

Article 9 also brings legacies within the international debt allocation rules by applying them correspondingly.

Documentation

Which documents are important for deducting debts?

Document What it establishes
Loan agreement The legal basis and original purpose of the financing
Bank statements The actual movement of funds and how they were used
Property purchase agreement The connection between the loan and the property acquisition
Mortgage or land register documents The security provided and its connection with the property
Construction cost statements The use of funds for construction or renovation
Business records The allocation of a debt to permanent establishment assets
Will / inheritance agreement Legacies and other liabilities affecting the estate
Balance confirmations as at the date of death The amount of the liability actually outstanding

Assessment sequence

Allocate estate debts in eight steps

01

Establish the debt

Does a relevant liability exist at the date of death?

02

Deductibility

Check the domestic requirements under section 10 ErbStG.

03

Use of funds

Establish the actual economic purpose of the financing.

04

Asset connection

Check the connection with specific assets.

05

Article 9(1)

Allocate debts relating to specific assets to those assets.

06

Other debts

Apply Article 9(2).

07

Excess debt

Reallocate any remaining portion of the debt.

08

Treaty consistency

Allocate assets and debts consistently between the two states.

Frequently asked questions

Estate debts involving Germany and Switzerland

Which provision governs estate debts under the inheritance tax treaty?
The international allocation of estate debts is governed by Article 9 of the Germany–Switzerland inheritance tax treaty.
What is the basic principle of Article 9?
Debts economically connected with a particular asset are generally deducted from the value of that asset.
Is a mortgage always allocated to the property?
The economic connection is decisive. If the loan was actually used to finance the property, this generally supports allocation to that property. Security over the property alone should not be equated with an economic connection without further assessment.
How is a loan financing German real estate treated?
If an economic connection with the German property exists, the debt is generally allocated to that property under Article 9(1).
What applies to Swiss real estate?
A mortgage or loan liability economically connected with Swiss real estate is likewise generally allocated to that property.
How are debts without a connection to a particular asset treated?
Under Article 9(2), these other debts are generally allocated to the assets taxed in the deceased’s state of domicile.
What happens if there is excess debt?
If an allocated debt exceeds the value of the corresponding category of assets, the further paragraphs of Article 9 provide rules for allocating the remaining portion of the debt.
Does Article 9 also apply to legacies?
Yes. Article 9 provides that the rules on deducting debts also apply correspondingly to legacies.
Does the treaty itself define what constitutes a debt?
Not comprehensively. Where the agreement does not provide its own definition, Article 3(2) generally requires reference to domestic law.
Which German provision is important for debt deductions?
On the German side, section 10 ErbStG is particularly relevant to the deductibility of estate liabilities.
What did the BFH decide in II R 45/92?
The BFH confirmed that debts may be deducted from the value of the relevant assets under Article 9(1) where an economic connection exists. The case concerned, in particular, loan liabilities and German real estate owned by a deceased person who had lived in Switzerland.
Did only limited German tax liability apply in the BFH case?
Yes. The deceased and the heirs were German nationals but had already lived in Switzerland for more than five years. Germany therefore essentially taxed the relevant German domestic assets.
Must family loans satisfy an arm’s-length test?
In II R 45/92, the BFH clarified that the income tax principles governing the arm’s-length assessment of loan agreements between close relatives cannot simply be transferred to the recognition of an estate liability for inheritance tax.
Does this mean every family loan is deductible?
No. The liability must actually exist for both civil law and tax purposes. Allocation to a specific asset under the treaty additionally requires proof of the economic connection.
Which documents are particularly important?
Loan agreements, bank transactions, purchase agreements, land register documents, financing records and outstanding balances at the date of death are generally particularly important.

Germany–Switzerland tax advice

Do you need to allocate debts within an estate involving Germany and Switzerland?

We assess the deductibility of estate liabilities, the economic connection under Article 9 of the treaty, allocation to real estate, permanent establishments and other assets, and the implications for German and Swiss inheritance tax.

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