Germany–Switzerland · Section 2 ErbStG
Unlimited · extended · limited tax liabilityUnlimited and limited inheritance and gift tax liability in cases involving Switzerland
Whether Germany may tax an inheritance or gift involving Switzerland depends first on personal tax liability under section 2 of the German Inheritance and Gift Tax Act (ErbStG). If the deceased, donor or recipient qualifies as a German resident for inheritance and gift tax purposes (an “Inländer”), the entire acquisition may generally fall within the scope of German tax. An important rule continues to apply to German nationals after they move abroad: they generally retain this status for up to five years after departure. Even where there is no personal connection to Germany, limited tax liability may still arise in respect of German domestic assets under section 121 of the German Valuation Act (BewG).
Starting point
Section 2 ErbStG determines the scope of German taxation
German inheritance and gift tax law fundamentally distinguishes between unlimited and limited tax liability.
Unlimited tax liability generally covers the entire acquisition. The location of the assets is initially irrelevant.
Limited tax liability, by contrast, covers only certain German domestic assets within the meaning of section 121 BewG.
German nationals are also subject to a special rule that continues to apply after they move abroad. This is often referred to as extended unlimited inheritance and gift tax liability.
Scope
Unlimited versus limited tax liability
| Type of tax liability | Connecting factor | Scope |
|---|---|---|
| Unlimited tax liability | The deceased, donor or recipient qualifies as a German resident for inheritance and gift tax purposes | Generally the entire acquisition, including worldwide assets |
| Extended unlimited tax liability | A German national remains within the statutory period of continued liability after moving abroad | Generally continues to cover the entire acquisition |
| Limited tax liability | No party qualifies as a German resident for inheritance and gift tax purposes | Only German domestic assets under section 121 BewG |
Section 2(1) no. 1 ErbStG
One qualifying German resident can generally bring the entire acquisition within German tax
Acquisitions on death and lifetime gifts are subject to unlimited German tax liability if the deceased qualifies as a German resident at the time of death, the donor at the time the gift is completed, or the recipient at the relevant time.
The law therefore does not require both the transferor and the recipient to be resident in Germany.
A single personal connection to Germany may be sufficient.
- The deceased qualifying as a German resident may be sufficient
- The donor qualifying as a German resident may be sufficient
- The recipient qualifying as a German resident may be sufficient
- Swiss assets are generally included
- Treaty relief or tax credits are considered at the next stage
The location of the assets does not restrict unlimited tax liability
Swiss bank accounts, securities portfolios, real estate and business interests may therefore generally form part of the acquisition subject to German tax. Whether Germany must ultimately exempt particular assets under a double taxation agreement is a separate question addressed at a later stage.
German resident status
Who qualifies as a German resident for inheritance and gift tax purposes?
Section 2 ErbStG contains its own definition of “Inländer”. For individuals, the following groups are particularly relevant.
Residence
Individuals with a residence in Germany generally qualify as German residents for these purposes.
Habitual abode
Having a habitual abode in Germany can also establish German resident status for these purposes.
German nationals after departure
German nationals may continue to qualify as German residents for a transitional period after giving up their residence in Germany.
Distinguish income tax residence from inheritance tax status
Personal tax liability under section 2 ErbStG must be assessed separately. In particular, treaty residence in Switzerland does not automatically remove German resident status under German inheritance tax law.
Section 2(1) no. 1, second sentence, point (b) ErbStG
German nationals generally remain within the scope of tax for five years after moving abroad
A particularly important rule in Germany–Switzerland cases concerns German nationals who have given up their residence in Germany.
They continue to qualify as German residents for inheritance and gift tax purposes until they have lived permanently abroad for more than five years without maintaining a residence in Germany.
As a result, an inheritance or gift shortly after departure may remain subject to unlimited German tax liability, even if neither the particular asset nor the current residence has a connection to Germany.
Moving to Switzerland does not immediately end German gift tax liability
Particularly where gifts are planned after the move, the five-year rule is often more decisive than the actual departure date.
The five-year rule applies only to German nationals
A foreign national who gives up their only residence in Germany does not remain subject to unlimited tax liability for a further five years solely because of this provision. Other connecting factors to Germany may, of course, continue to exist.
Case law
BFH II R 5/20: a gift shortly after moving to Switzerland
Swiss property and a Swiss usufruct, yet German gift tax still applied
In the case decided by the German Federal Fiscal Court (BFH), both the mother and her son were German nationals. They had given up their German residences and moved to Switzerland in November 2011.
In December 2011, the mother transferred a property located in Switzerland to her son. She reserved a lifetime usufruct under Swiss law.
Although the donor, recipient and property were all in Switzerland at the time of the gift, the acquisition remained subject to unlimited German gift tax liability.
This resulted from the continued application of section 2(1) no. 1, second sentence, point (b) ErbStG: both parties were German nationals and had only recently begun living permanently abroad.
The BFH also confirmed that this extended unlimited gift tax liability infringes neither the general principle of equality nor the free movement of capital under EU law.
The inheritance tax treaty provided no relief for the gift
The special inheritance tax agreement between Germany and Switzerland generally does not apply to ordinary lifetime gifts. Any double taxation arising from Swiss gift tax must therefore, where applicable, be addressed under section 21 ErbStG.
Section 2(1) no. 3 ErbStG
Limited tax liability may remain even if no party qualifies as a German resident
If neither the deceased or donor nor the recipient qualifies as a German resident for inheritance and gift tax purposes, Germany’s scope for taxation is considerably narrower.
Germany then generally taxes only an acquisition consisting of German domestic assets within the meaning of section 121 BewG, or including a claim to the transfer of such assets.
The term “German domestic assets” is defined by law and must not be equated with every economic connection to Germany.
Limited tax liability does not cover “everything connected with Germany”
The statutory list in section 121 BewG is decisive. Where none of the parties qualifies as a German resident, only assets covered by that provision can generally be subject to limited German inheritance or gift tax liability.
Section 121 BewG
What qualifies as German domestic assets?
| Asset | German domestic asset? | Requirements / comments |
|---|---|---|
| German real estate | Yes | Land or other qualifying real property located in Germany |
| German agricultural and forestry assets | Yes | Agricultural and forestry assets located in Germany |
| Domestic business assets | Yes | In particular, a German permanent establishment or permanent representative |
| Shares in a German corporation | Subject to conditions | The company has its registered office or place of management in Germany, and the shareholding generally amounts to at least 10%, taking related parties’ holdings into account |
| A German bank account | Generally not on that basis alone | An ordinary bank deposit does not fall within section 121 BewG merely because it is held with a German bank |
| Listed German shares below the shareholding threshold | Generally not solely because the issuer is German | Shares in corporations are subject to the specific requirements of section 121 no. 4 BewG |
| A receivable secured by German real estate | May qualify | Section 121 contains specific rules for receivables secured by real estate |
| A silent partnership interest / profit-participating loan | Subject to conditions | The debtor has a relevant connection to Germany through their residence, registered office or place of management |
Observe the 10% threshold for German corporations
For shares in a German corporation to fall within limited tax liability, section 121 no. 4 BewG generally requires a holding of at least one tenth of the company’s share capital. Holdings of related parties may also be taken into account.
Typical Germany–Switzerland scenarios
What type of tax liability arises in common situations?
| Scenario | Basic German tax position |
|---|---|
| The deceased lived in Switzerland; the heir lives in Germany | Unlimited tax liability because of the recipient’s German resident status; the inheritance tax treaty must then be assessed |
| The donor lives in Switzerland; the recipient lives in Germany | Unlimited gift tax liability because of the recipient’s German resident status |
| A German national moves to Switzerland and makes a gift one year later | Unlimited tax liability generally continues under the five-year rule |
| Donor and recipient in Switzerland, with no personal German connecting factor; the gift concerns German real estate | Limited tax liability because the acquisition includes German real estate |
| Deceased and heir in Switzerland, with no personal German connecting factor; the estate includes an ordinary Swiss securities portfolio | Generally no German tax liability arising solely from these assets |
| Deceased and heir in Switzerland; the estate includes a holding of at least 10% in a German GmbH | Limited tax liability may arise because the shares qualify as German domestic assets; the treaty must also be assessed |
Interaction with the tax treaty
Assess domestic tax liability first, then the treaty
Assessing personal tax liability under section 2 ErbStG and applying a double taxation agreement are two separate steps.
The first step is to establish whether Germany may impose tax under its domestic law.
For an acquisition on death involving Switzerland, the special Germany–Switzerland inheritance tax treaty may then restrict Germany’s taxing rights or provide relief from double taxation through exemption or a tax credit.
This inheritance tax treaty generally does not apply to ordinary lifetime gifts.
Section 2 ErbStG
May Germany impose tax under its domestic law?
Tax treaty
For inheritances: does the agreement restrict Germany’s taxing rights?
Relief
Determine whether exemption, a tax credit or section 21 ErbStG applies.
Swiss treaty residence does not automatically override section 2 ErbStG
Germany may therefore initially have unlimited taxing rights under section 2 ErbStG, while the Germany–Switzerland inheritance tax treaty subsequently restricts those rights in respect of particular assets.
Examples
Comparing unlimited and limited tax liability
Father in Switzerland, child in Germany
The child’s residence in Germany generally establishes unlimited German tax liability. The entire acquisition is initially included.
A German national moves to Switzerland
A German national may generally continue to qualify as a German resident for these purposes for five years, even after giving up their residence in Germany.
Both individuals live in Switzerland
Without a personal German connecting factor, Germany generally taxes only German domestic assets under section 121 BewG.
Assessment sequence
Assess personal tax liability in eight steps
Inheritance or gift?
Determine when the tax liability arises.
Transferor
Check residence and habitual abode.
Recipient
Establish any personal German connecting factor.
Nationality
If a party has moved abroad, check the German five-year rule.
Unlimited liability?
If so, generally include the entire acquisition.
If not
Check for German domestic assets under section 121 BewG.
Tax treaty
For inheritances, determine any restrictions imposed by the treaty.
Relief
Apply an exemption or tax credit.
Frequently asked questions
Inheritance and gift tax liability in cases involving Switzerland
When does unlimited German inheritance tax liability arise?
When does unlimited German gift tax liability arise?
Is the recipient’s German residence sufficient?
What does unlimited tax liability mean?
Is Swiss real estate included under unlimited tax liability?
How long does a German national remain liable to tax after moving abroad?
Does the five-year rule also apply to Swiss nationals?
What did the BFH decide in II R 5/20?
Is the five-year rule unconstitutional?
When does only limited tax liability apply?
Does German real estate qualify as a German domestic asset?
Is an account with a German bank automatically a German domestic asset?
Do shares in a German GmbH qualify as German domestic assets?
Does the tax treaty change unlimited tax liability?
Does the inheritance tax treaty apply to gifts?
Further reading
Tax liability, treaty relief & moving abroad
Germany–Switzerland tax advice
Would you like to establish whether Germany may tax an inheritance or gift?
We assess personal tax liability under section 2 ErbStG, German residence connections, the five-year rule for German nationals, and limited tax liability for German domestic assets under section 121 BewG. For inheritances, we also examine the restrictions on German taxing rights imposed by the Germany–Switzerland inheritance tax treaty.
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