Germany–Switzerland · Article 9 of the treaty
Debt deductions · Mortgages · LoansEstate 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 purchase
A loan taken out directly to finance the purchase price of the property.
Construction costs
Financing the construction, extension or substantial renovation of a property.
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.
General personal loan
No identifiable financing of a particular asset.
Personal tax liabilities
To the extent deductible, these often cannot be directly allocated to an individual asset.
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
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
Swiss property with a mortgage
The mortgage directly finances the acquisition of the Swiss property. It is generally allocated to that 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.
General consumer loan
If there is no connection to a particular asset, the rule for other debts generally applies.
Financing a permanent establishment
A loan used to finance a specific permanent establishment is generally allocated to the corresponding business assets.
Loan used for several purposes
If loan proceeds are used for several assets, an appropriate apportionment may be necessary.
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
Establish the debt
Does a relevant liability exist at the date of death?
Deductibility
Check the domestic requirements under section 10 ErbStG.
Use of funds
Establish the actual economic purpose of the financing.
Asset connection
Check the connection with specific assets.
Article 9(1)
Allocate debts relating to specific assets to those assets.
Other debts
Apply Article 9(2).
Excess debt
Reallocate any remaining portion of the debt.
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?
What is the basic principle of Article 9?
Is a mortgage always allocated to the property?
How is a loan financing German real estate treated?
What applies to Swiss real estate?
How are debts without a connection to a particular asset treated?
What happens if there is excess debt?
Does Article 9 also apply to legacies?
Does the treaty itself define what constitutes a debt?
Which German provision is important for debt deductions?
What did the BFH decide in II R 45/92?
Did only limited German tax liability apply in the BFH case?
Must family loans satisfy an arm’s-length test?
Does this mean every family loan is deductible?
Which documents are particularly important?
Further reading
Tax treaties, estates & cross-border taxation
Germany–Switzerland tax advice
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