German inheritance tax · U.S. decedent
German assets of a U.S. decedent
A decedent living in the United States can still leave assets that are subject to German inheritance tax. German real estate, certain business interests and other German-situs property can be taxable even where neither the decedent nor the heir lives in Germany. If the beneficiary is German-resident, Germany can potentially tax the entire worldwide acquisition. The Germany–U.S. estate-and-gift-tax treaty must then also be considered.
Section 2 ErbStG
A U.S. residence of the decedent does not eliminate German inheritance tax
For German inheritance tax purposes, the place where the decedent lived is not the only relevant factor. Section 2 ErbStG distinguishes between unlimited and limited German tax liability.
If the beneficiary is resident in Germany, that German residence alone can cause Germany to tax the entire acquisition. If the beneficiary also lives outside Germany, limited German tax liability can still apply to qualifying German-situs assets.
A U.S. decedent with German property should therefore be reviewed on two separate levels: the personal tax status of the parties and the legal classification or situs of the individual assets.
Two basic cases
Unlimited or limited German inheritance tax liability?
Beneficiary lives in Germany
If the heir or other beneficiary is a German resident within the meaning of Section 2 ErbStG at the date of death, Germany can generally tax the entire acquisition, including both German and U.S. assets.
Beneficiary also lives abroad
If neither the decedent nor the beneficiary is a German resident, Germany can still tax certain German-situs property under the limited-tax-liability rules.
Limited tax liability
Where everyone lives abroad, German-situs property becomes decisive
If unlimited German inheritance tax liability does not apply, Germany taxes only German-situs property within the meaning of the ErbStG in conjunction with Section 121 BewG.
This concept is narrower than “anything connected with Germany.” Each asset must therefore be classified separately.
- German real estate
- certain German business assets
- certain interests in German corporations
- other specifically listed German-situs assets
- not every German bank account is automatically German-situs property
Typical asset categories
German assets frequently relevant where the decedent lived in the U.S.
German real estate
A house, apartment, land or other real property located in Germany is one of the clearest examples of German-situs property. Germany can tax it even where all relevant individuals live abroad.
Interests in German corporations
Shares in a German GmbH or AG can qualify as German-situs property under specific conditions. The ownership percentage and statutory requirements are particularly important.
German business or permanent establishment
German business property can be subject to German inheritance tax even if the owner lived in the United States. German business-property relief may also need to be reviewed.
German bank accounts
A balance with a German bank is not automatically German-situs property merely because the bank is located in Germany. Under unlimited tax liability, however, the account would generally be included anyway.
Brokerage account held in Germany
The location of the custodian alone does not determine limited German tax liability. The specific assets held in the account and the German-situs rules must be reviewed.
German partnerships
For partnership interests, the underlying business or real estate assets and the German inheritance-tax classification of the interest can be decisive.
German real estate
German real estate is the classic case of overlapping taxing rights
If a U.S.-resident decedent leaves real estate in Germany, Germany will generally have a taxing right. This can apply even where the heir also lives in the United States and no unlimited German tax liability exists.
At the same time, the United States can tax the estate because of the decedent's U.S. citizenship or U.S. domicile. The same property can therefore initially be relevant in both tax systems.
Article 5 of the Germany–U.S. estate-and-gift-tax treaty specifically addresses immovable property, while Article 11 coordinates the resulting double taxation.
GmbH interests
German corporate interests require a more detailed analysis
Not every interest in a German company automatically triggers German inheritance tax where only limited tax liability applies. The statutory German-situs requirements must be satisfied.
Larger interests in a German corporation can, however, qualify as German-situs property. Valuation, the company's articles and potential business-property relief must then be examined separately.
Valuation
Unlisted GmbH interests must be valued under German valuation law. A value reported for U.S. estate tax purposes is not automatically binding in Germany.
Relief
Sections 13a and 13b ErbStG can become relevant for qualifying business property, subject to the detailed German requirements.
Valuation
German property is valued under German inheritance tax law
Even where the decedent lived in the United States, the German tax base is generally determined under German law. A U.S. estate tax value or probate value can provide evidence but is not automatically controlling.
Real Estate
German real property is valued using the German inheritance-tax valuation methods.
Businesses
Unlisted business interests can require a separate valuation under the German Valuation Act.
Valuation Date
The relevant value is generally the value at the date of death. A later sale price does not replace the tax valuation date.
Estate & Gift Tax Treaty
The treaty determines which country may tax particular assets
Where a U.S. decedent leaves German property, the separate Germany–U.S. estate-and-gift-tax treaty must be reviewed in addition to Section 2 ErbStG.
The decedent's treaty residence is first determined under Article 4. The individual assets are then classified under Articles 5 through 9.
- Article 4: treaty residence of the decedent
- Article 5: German immovable property
- Article 6: German permanent-establishment property
- Article 8: certain partnership interests
- Article 9: other property
- Article 11: foreign-tax credits
Article 5
Germany may tax German immovable property
Article 5 of the estate-and-gift-tax treaty gives the situs state a taxing right over immovable property. German real estate can therefore be subject to German inheritance tax even if the decedent was resident in the United States.
This is one of the clearest cases in which German limited tax liability and the treaty's asset-allocation rule point in the same direction.
Article 11
If both countries tax, the double taxation must be coordinated
The United States can tax a U.S. citizen or U.S.-domiciled decedent on a worldwide estate. Germany can at the same time tax qualifying German property.
Article 11 of the estate-and-gift-tax treaty contains the foreign-tax-credit rules. Which country must grant the credit depends in particular on the decedent's treaty residence, the residence of the beneficiary and the type of property involved.
U.S. tax should therefore not simply be offset against German inheritance tax without first identifying the applicable treaty provision.
German-resident beneficiary
If the heir lives in Germany, German taxing jurisdiction expands substantially
If the beneficiary is resident in Germany at the date of death, the analysis is no longer limited to German-situs property. Germany can generally tax the entire acquisition.
U.S. assets of the decedent then also become part of the German inheritance tax analysis. Article 11(3) is particularly relevant for the credit of qualifying U.S. taxes.
A German bank account is not the same as German real estate
For limited German tax liability, “German assets” should not be interpreted too broadly. An asset does not become German-situs property merely because it is held by a German bank or managed by a German institution.
Bank accounts, brokerage accounts, receivables and corporate rights therefore require a specific review under Section 121 BewG.
Estate liabilities
Debts must be properly allocated to the German taxable property
The German inheritance tax analysis should consider not only gross asset values. Mortgages, business liabilities and other debts can reduce the taxable acquisition.
Under limited tax liability, however, special rules apply to the deduction of estate liabilities. The economic connection with the German taxable property can be decisive.
Mortgage on German real estate
A debt directly connected with German real estate can be relevant in calculating the German taxable net acquisition.
General U.S. estate liabilities
Not every general liability of a U.S. estate can automatically be deducted against German property in a limited-tax-liability case.
Documentation
Documents typically needed for German assets of a U.S. decedent
Will & Probate Documents
Will, letters testamentary, probate documents and evidence identifying the heirs or beneficiaries.
German Real Estate Documents
Land-register extracts, purchase agreements, lease documents, loan records and available appraisals.
Company Documents
Shareholder lists, articles, financial statements and ownership records for GmbH, AG or partnership interests.
Form 706
Where available, the U.S. estate tax return can provide important information about the estate, values and U.S. tax.
U.S. Tax Assessments
Evidence of federal or state estate taxes actually assessed and paid.
Residence Evidence
Documentation of the residence of both decedent and beneficiary can be essential for Section 2 ErbStG and Article 4 of the treaty.
Common mistakes
Issues frequently misclassified where a U.S. decedent leaves German assets
“The decedent lived in the U.S., so Germany cannot tax”
German-situs property can be subject to German inheritance tax even where everyone lives abroad.
Ignoring the beneficiary's residence
A German-resident heir can cause Germany to tax the entire worldwide acquisition.
Treating every German account as German-situs property
The German-situs concept is governed by Section 121 BewG and is narrower than a general connection with Germany.
Using U.S. valuations without review
German inheritance tax values are generally determined under German valuation law.
Ignoring the treaty
The estate-and-gift-tax treaty is central to coordinating taxing rights where a U.S. decedent leaves German property.
Crediting U.S. tax automatically
A tax credit requires application of the specific Article 11 rules and proper allocation of the foreign tax.
Further guidance
Related topics
Frequently asked questions
German assets of a U.S. decedent
Can German inheritance tax apply if the decedent lived in the United States?
Is German real estate taxable where the decedent lived in the U.S.?
Is a German bank account automatically German-situs property?
What about shares in a German GmbH?
Does the Germany–U.S. estate tax treaty apply to German assets of a U.S. decedent?
Can the United States also tax German property?
Which value applies to German real estate?
What changes if the heir lives in Germany?
Germany–U.S. tax advice
Did a U.S. decedent leave assets in Germany?
We analyze unlimited or limited German inheritance tax liability, German-situs property under Section 121 BewG, valuation, asset allocation under the Germany–U.S. estate-and-gift-tax treaty and coordination with U.S. federal and state estate taxes.
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