Estate & Gift Tax Treaty · German perspective
Germany–U.S. estate, inheritance and gift tax treaty
Germany and the United States have a separate double-tax treaty for estate, inheritance and gift taxes in addition to their income tax treaty. The convention contains its own residence rules, allocates taxing rights for certain categories of property and determines how double taxation by German and U.S. estate or gift taxes is relieved.
Separate treaty
The estate-and-gift-tax treaty must be distinguished from the income tax treaty
The Germany–U.S. income tax treaty governs income tax matters. Estate, inheritance and gift taxes are covered by a separate convention dated December 3, 1980, as amended by the protocol of December 14, 1998.
The amending protocol entered into force on December 14, 2000. The consolidated treaty is relevant for current cases.
Definitions and allocation rules from the income tax treaty should therefore not simply be imported into an estate or gift tax analysis.
Order of analysis
The treaty comes into play only after German domestic tax liability has been determined
ErbStG
First determine whether Germany has unlimited or limited taxing jurisdiction under Section 2 ErbStG.
Treaty applicable?
Next determine whether the personal and substantive scope of the estate-and-gift-tax treaty is satisfied.
Treaty residence
Article 4 determines the relevant residence of the deceased or donor for treaty purposes.
Allocation & credit
Articles 5–9 allocate property, while Article 11 coordinates any resulting double taxation.
Personal scope
Not every inheritance involving U.S. property automatically falls under the treaty
For estates, the convention generally looks to the residence of the deceased at the time of death. For gifts, it generally looks to the residence of the donor at the time of the gift.
A U.S. connection involving only a particular asset is therefore not necessarily enough. Before applying the substantive treaty articles, the residence of the deceased or donor must be determined under the treaty rules.
Article 4
The treaty has its own residence concept
Article 4 determines in which contracting state the deceased or donor is treated as resident for purposes of the convention. This concept should not simply be equated with treaty residence under the income tax treaty.
A special feature is that U.S. citizenship can itself be relevant to U.S. residence for purposes of this estate-and-gift-tax convention.
- separate estate-tax residence definition
- German residence can establish German treaty residence
- U.S. citizenship can be relevant on the U.S. side
- dual residence triggers special tie-breaker rules
- additional special rule for certain migration cases
Dual residence
A separate tie-breaker cascade applies where both countries initially treat the person as resident
If a person initially satisfies the residence rules of both contracting states, treaty residence is determined using additional criteria.
Permanent home
The first question is in which country a permanent home is available.
Center of vital interests
If a permanent home exists in both countries, the closer personal and economic relations are examined.
Habitual abode
If the center of vital interests cannot be determined, habitual abode becomes relevant.
Citizenship
Citizenship can then become decisive; unresolved cases may require competent-authority consultation.
Article 4(3)
The special ten-year rule can be crucial after a move between Germany and the United States
The treaty contains an additional rule for certain individuals who are exclusively citizens of one contracting state, are initially resident in both countries and have lived in the other contracting state only for a limited period.
Where Article 4(3) applies, treaty residence can remain assigned to the country of citizenship notwithstanding the ordinary tie-breaker rules. The relevant period can extend to ten years.
This provision must be kept separate from the German domestic extended-residence rule under Section 2 ErbStG, which generally uses a five-year period for certain German citizens after emigration.
BFH on the ten-year rule
The special rule does not automatically apply to every U.S. beneficiary living in Germany
In its decision of September 20, 2022 – II B 2/22 – the German Federal Fiscal Court clarified that Article 4(3) does not automatically apply to a recipient outside the deceased's household merely because Germany taxes that recipient under Article 11(1)(b) based on German residence.
The case involved a U.S. citizen living in Germany who received a death benefit from a U.S. retirement arrangement following the death of her aunt in the United States. Germany was generally entitled to tax the acquisition because of the recipient's German residence.
Articles 5 to 9
After treaty residence has been determined, individual asset categories must be allocated
The convention contains special taxing rules for different types of property. An estate or gift should therefore not be analyzed as one undivided pool of assets.
Immovable property
Real estate may generally also be taxed in the contracting state where it is located. U.S. real estate can therefore be subject to a U.S. taxing right in addition to German inheritance tax.
Permanent-establishment property
Property attributable to a permanent establishment or comparable fixed place in the other country can be subject to a separate taxing right there.
Partnership interests
Partnership interests can be treated separately, particularly to the extent the partnership owns real estate or permanent-establishment property.
Other property
Property not covered by the special allocation rules is generally assigned to the treaty-residence country of the deceased or donor, subject in particular to Article 11.
Brokerage account
Stocks and ordinary portfolio assets do not automatically follow the same treaty rules as U.S. real estate. The specific asset category must be analyzed separately.
Business interests
Corporation, LLC, partnership and German company interests require legal and tax classification before the treaty allocation can be determined.
German-resident recipient
Asset allocation does not end the German tax analysis
From the German perspective, Article 11 is particularly important. A German-resident heir or donee can be subject to unlimited German tax even though the deceased or donor lived in the United States.
The treaty does not eliminate German taxation in every such case. Instead, Article 11 can allow Germany to continue taxing while requiring relief through a credit for qualifying U.S. tax.
Article 11
Article 11 is the central provision for relief from double taxation
If both Germany and the United States tax the same acquisition or the same asset, Article 11 determines which country must credit the tax imposed by the other.
For a German recipient, it is particularly important that Germany does not necessarily surrender its taxing right. Where the treaty requirements are met, qualifying U.S. tax attributable to particular assets can instead be credited against the corresponding German inheritance or gift tax.
- no blanket exemption for all U.S. assets
- credit depends on treaty allocation and the type of tax
- U.S. tax must be attributable to the relevant property
- the credit is generally limited by the corresponding German tax
- special rules apply to German-resident recipients
- state and local taxes can be relevant under specific treaty provisions
Section 21 ErbStG
The treaty takes priority over the general German foreign-tax credit rule
Section 21 ErbStG contains a domestic German rule for crediting certain foreign inheritance taxes. As a general matter, however, it applies only where no double-tax treaty governs the case.
If the Germany–U.S. estate-and-gift-tax treaty applies, Article 11 must therefore be examined first. The German credit cannot be determined solely under Section 21 ErbStG.
BFH on foreign-tax credits
U.S. Federal Income Tax is not automatically creditable estate tax
In its judgment of June 15, 2016 – II R 51/14 – the BFH held that U.S. “Federal Income Tax Withheld” imposed on an inherited insurance-related payment was not creditable against German inheritance tax under either Section 21 ErbStG or the Germany–U.S. estate tax treaty.
The decision confirms an important distinction: not every U.S. tax imposed in connection with inherited property qualifies as a creditable tax under the estate-and-gift-tax treaty.
In the particular case, however, the BFH allowed the income tax to be deducted as a liability of the estate because it related to untaxed income of the deceased. A tax credit and a deduction as an estate liability are therefore separate questions.
Example
German heir receives property from a U.S. estate
German residence
A German-resident heir can trigger unlimited German inheritance tax on the worldwide acquisition under Section 2 ErbStG.
U.S. decedent
The deceased's treaty residence is determined under Article 4.
Asset categories
U.S. real estate, business property and other assets are classified separately under the relevant treaty articles.
Tax credit
Any qualifying U.S. tax actually imposed is credited against German tax where Article 11 requires it.
Article 12 · Estates & trusts
Trust structures can create additional treaty issues
With U.S. trusts, Germany and the United States can differ in the timing and legal characterization of a transfer of assets. Article 12 therefore contains special rules for estates and trusts.
For German tax purposes, it must also be determined whether the trust constitutes an independent pool of assets separate from the settlor, whether distributions are made to an intermediate beneficiary and when a taxable transfer occurs upon termination.
In addition, a German-resident settlor or beneficiary can be affected by ongoing attribution taxation under Section 15 AStG. In 2025, the German Federal Ministry of Finance published a draft for a substantial reform of this provision.
Case law
Important BFH decisions in the Germany–U.S. context
Treaty residence and a U.S. recipient living in Germany
Article 4(3) does not automatically apply to a recipient outside the deceased's household merely because Germany taxes under Article 11(1)(b) based on that recipient's German residence.
No credit for U.S. Federal Income Tax
U.S. Federal Income Tax Withheld on an inherited payment was not creditable against German inheritance tax under either Section 21 ErbStG or the estate tax treaty.
U.S. trust and German gift tax
Distributions from a U.S. trust to an intermediate beneficiary can trigger German gift tax. The BFH also considered Article 12 of the Germany–U.S. estate tax treaty.
Intermediate beneficiary of a trust
The beneficiary's actual rights under the applicable foreign trust law are decisive. German courts must determine that foreign law as part of the tax analysis.
Common mistakes
Issues frequently misclassified under the Germany–U.S. estate tax treaty
Using the income tax treaty
Inheritance and gift taxes are governed by a separate convention with a separate legal framework.
Equating treaty residence with income tax residence
Article 4 contains its own definitions and special rules that must be analyzed independently.
Applying the ten-year rule to the recipient
BFH case law shows that Article 4(3) cannot simply be transferred to a recipient outside the deceased's household.
Treating all U.S. assets the same
Real estate, permanent-establishment property, partnership interests and other assets follow different treaty rules.
Assuming the treaty means exemption
For German recipients in particular, the convention often uses a foreign-tax credit rather than complete exemption.
Crediting every U.S. tax
U.S. income tax must be distinguished from U.S. estate and gift taxes for treaty and German credit purposes.
Further guidance
Detailed treaty topics
Frequently asked questions
Germany–U.S. estate and gift tax treaty
Is there an inheritance tax treaty between Germany and the United States?
Does the treaty also apply to gifts?
How is residence determined under the treaty?
What is the treaty's ten-year rule?
Which country may tax U.S. real estate in an inheritance?
Does the treaty prevent German inheritance tax for a German heir?
Can U.S. Federal Income Tax be credited against German inheritance tax?
Does the treaty apply to U.S. trusts?
Germany–U.S. tax advice
Are you dealing with an inheritance or gift between Germany and the United States?
We analyze German inheritance and gift tax, the personal scope of the estate-and-gift-tax treaty, treaty residence under Article 4, asset allocation under Articles 5–9 and foreign-tax credits under Article 11. For U.S. trusts, we also consider German trust case law and Section 15 AStG.
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