Article 11 Treaty · Section 21 ErbStG
Credit U.S. Estate Tax against German inheritance tax
A German-resident beneficiary receiving assets from the United States can face both German inheritance tax and U.S. estate tax or other U.S. taxes. Where the Germany–U.S. estate-and-gift-tax treaty applies, the credit of U.S. tax against German inheritance tax is governed primarily by Article 11. Not every U.S. tax qualifies for a credit, and U.S. income tax must be distinguished carefully from estate and gift tax.
Double taxation
Germany can tax even where U.S. estate tax has already been imposed
If an heir or other beneficiary is resident in Germany, unlimited German inheritance tax liability under Section 2 ErbStG can generally extend to the worldwide acquisition, including U.S. property.
At the same time, the United States can impose federal estate tax because of the decedent's U.S. citizenship or domicile or because particular assets are situated in the United States.
The estate-and-gift-tax treaty does not eliminate all overlap through exemption. In important situations, Article 11 instead uses a foreign-tax-credit mechanism.
Article 11
Article 11(3) is particularly important for German-resident beneficiaries
Where Germany imposes inheritance or gift tax because of the residence of the decedent, donor, heir, donee or other beneficiary, Article 11(3) determines how overlapping U.S. taxation is relieved.
The treaty distinguishes between property that the United States may tax under the special situs provisions and other property where the decedent or donor was resident in the United States and the beneficiary was resident in Germany.
- Article 11(3)(a): property covered by Articles 5, 6 or 8
- Article 11(3)(b): other property where the decedent or donor was U.S.-resident
- Germany generally retains taxing rights where the recipient is German-resident
- qualifying U.S. tax is credited against German tax attributable to the relevant property
- the credit does not create an unlimited refund of excess foreign tax
Article 11(3)(a)
U.S. tax on specially allocated property
If the United States is permitted to tax an asset under Articles 5, 6 or 8, Germany generally must credit qualifying U.S. tax against the German tax attributable to that property where Germany also taxes because of German residence.
U.S. real estate
U.S. real property can be taxed in the country where it is located. Germany can still tax under unlimited tax liability and must then review the treaty credit.
Permanent-establishment property
Property attributable to a U.S. permanent establishment can be subject to U.S. taxing rights and can therefore enter the German credit calculation.
Partnership interests
To the extent partnership property falls within Article 8 and is taxable in the United States, a credit under Article 11(3)(a) can also become relevant.
Article 11(3)(b)
Other property of a U.S. decedent can also qualify for the German credit
Article 11 extends beyond classic situs-property cases. If the decedent or donor was resident in the United States for treaty purposes and the heir, donee or other beneficiary was resident in Germany, Germany may also have to credit qualifying U.S. tax on other property under Article 11(3)(b).
This is particularly important because a German-resident beneficiary can trigger German taxation of the worldwide acquisition solely by reason of German residence.
Which U.S. tax?
Estate tax, gift tax, state tax and income tax must be distinguished
A tax expressly covered by the treaty
Article 2 expressly identifies U.S. federal estate tax as one of the taxes covered by the convention. It is therefore the classic U.S. tax for which a credit under Article 11 is considered.
Lifetime gifts are also covered
Federal gift tax, including the generation-skipping transfer tax to the extent covered by the treaty, also falls within the convention's substantive tax scope.
Special credit rule
State taxes are not among the federal taxes listed in Article 2. Article 11(4), however, expressly requires Germany to take certain taxes imposed by U.S. political subdivisions into account when granting the credit under paragraph 3.
Do not confuse it with estate tax
A U.S. income tax does not become creditable inheritance tax merely because it is imposed on an asset or payment received as a consequence of death.
State estate or inheritance taxes: review Article 11(4) separately
The convention's list of covered U.S. taxes focuses on federal estate and gift taxes. For the German credit, however, Article 11(4) contains an additional rule requiring Germany, in connection with paragraph 3, to take into account taxes imposed by political subdivisions of the United States.
If a particular state tax cannot be relieved directly under paragraph 3, the treaty also provides for competent-authority consultation under Article 13.
Section 21 ErbStG
Where the treaty applies, Article 11 takes priority
Section 21(1) ErbStG provides a domestic German credit for certain foreign taxes corresponding to German inheritance tax. The provision expressly operates only where no double-tax treaty applies.
In a Germany–U.S. treaty case, Article 11 therefore determines the substantive entitlement to the credit first. Section 21(4) ErbStG then provides for corresponding application of paragraphs 1 to 3 where a foreign tax is to be credited under a treaty.
Section 21 ErbStG
Practical credit requirements still have to be satisfied
Assessed
The foreign tax generally must actually have been assessed.
Paid
A merely potential U.S. tax is not enough. The German credit generally requires actual payment.
No outstanding refund
A tax that remains subject to reduction or refund cannot necessarily be treated as a final creditable amount.
Asset allocation
The U.S. tax must be attributable to the property that is also subject to German tax.
Documentation
Section 21(3) requires evidence of the foreign property and of assessment and payment of the foreign tax.
Credit limitation
The credit generally cannot exceed the German tax attributable to the relevant property.
BFH, June 15, 2016 – II R 51/14
Federal Income Tax Withheld was not creditable against German inheritance tax
Death-related payment from a U.S. Thrift Savings Plan
A German-resident beneficiary received a payment from a U.S. Thrift Savings Plan following the death of a person living in the United States. U.S. Federal Income Tax Withheld was deducted from the payment.
Income tax does not correspond to German inheritance tax
The BFH held that the Federal Income Tax Withheld was not creditable against German inheritance tax under either Section 21 ErbStG or the Germany–U.S. estate tax treaty.
The tax related to the payment, not to the estate itself
The U.S. income-tax burden arose from the distribution and would generally also have arisen on a lifetime distribution. It was therefore not an estate tax or equivalent inheritance tax.
Still potentially relevant
Not creditable does not necessarily mean irrelevant for German inheritance tax
Although the BFH denied the foreign-tax credit in II R 51/14, it allowed the Federal Income Tax to be deducted as a liability of the estate.
In that particular case, the withholding tax arose because the payment contained income of the decedent that had not yet been taxed. The liability was therefore treated as originating with the deceased.
A non-creditable U.S. tax should consequently also be reviewed under Section 10 ErbStG to determine whether it may reduce the taxable German acquisition as an estate liability.
Calculation
The foreign-tax credit must be calculated on an asset-specific basis
The U.S. tax actually paid is not simply subtracted from total German inheritance tax. The foreign tax must first be allocated to the relevant property and the portion of German tax attributable to that property must be determined.
German tax
Determine the total taxable acquisition and German inheritance tax.
U.S. tax
Determine the type, amount, assessment and payment of the U.S. tax.
Allocate the tax
Identify which property the U.S. tax relates to.
Apply the limitation
Credit the U.S. tax only up to the German tax attributable to the same property.
Example
German heir inherits U.S. real estate
A German-resident heir receives U.S. real estate from a U.S. estate. Germany taxes the acquisition because the heir is subject to unlimited German inheritance tax. The United States may also tax the U.S. real estate under Article 5 of the treaty.
U.S. taxation
To the extent federal estate tax is actually attributable to the property, the amount and allocation of that tax must be established.
Credit under Article 11
Germany generally credits the qualifying U.S. tax against the portion of German inheritance tax attributable to the U.S. real estate.
If the U.S. tax exceeds the German tax attributable to the property, the credit generally does not create a refund of the excess by Germany.
U.S. decedent · German heir
Article 11(3)(b) can be crucial for other property
A particularly important case arises where the decedent was treaty-resident in the United States and the beneficiary was treaty-resident in Germany at the time of death.
Germany can then tax the worldwide acquisition because of the beneficiary's German residence. To the extent the United States also imposes tax covered by Article 11, paragraph 3(b) can require Germany to grant a credit even for property outside the specific Articles 5, 6 and 8 categories.
Documentation
Documents typically needed for the German credit
U.S. Estate Tax Return
Where applicable, Form 706 is an important starting point for documenting the federal estate-tax calculation.
Tax Assessment & Payment
The German credit requires reliable evidence of U.S. tax actually assessed and paid.
Asset Allocation
The taxpayer must be able to show which assets the U.S. tax relates to.
State Tax Documents
Where a U.S. state tax applies, the type of tax, calculation and payment should be documented separately.
U.S. Income Tax Documents
Forms such as 1099-R can be important to distinguish non-creditable income tax from estate tax.
German Inheritance Tax Return
The acquisition, asset values and claimed credit should be documented consistently in the German filing.
Common mistakes
Issues frequently mishandled when crediting U.S. taxes
Treating every U.S. tax as estate tax
Income tax, estate tax, gift tax and state taxes must be classified separately.
Looking only at Section 21 ErbStG
Where the treaty applies, Article 11 must be analyzed first.
Subtracting the entire U.S. tax
The credit is generally asset-specific and limited by the corresponding German tax.
Ignoring state taxes
Article 11(4) can make taxes imposed by U.S. political subdivisions relevant for the German credit.
Ignoring non-creditable income tax
Even if U.S. income tax is not creditable, it can in some cases still be reviewed as a potential estate liability.
Missing proof of payment
A calculated or expected U.S. tax is generally not enough for the German credit.
Further guidance
Related topics
Frequently asked questions
U.S. estate tax and German inheritance tax
Can U.S. estate tax be credited against German inheritance tax?
Is the entire U.S. estate tax credited?
Can U.S. Federal Income Tax be credited?
What about estate or inheritance tax imposed by a U.S. state?
What is the difference between Article 11 and Section 21 ErbStG?
Does the U.S. tax have to be paid already?
What happens if the U.S. tax is higher than the German tax?
Can non-creditable U.S. income tax still be taken into account?
Germany–U.S. tax advice
Do you have U.S. estate tax or other U.S. taxes in a German inheritance case?
We review the type of U.S. tax, treaty allocation of the assets, the credit under Article 11, the interaction with Section 21 ErbStG, relevant state taxes and, where U.S. tax is not creditable, whether it may instead qualify as an estate liability for German inheritance tax purposes.
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