German inheritance tax · U.S. assets
U.S. assets in a German inheritance
If a person subject to German inheritance tax receives assets in the United States, Germany can generally tax U.S. real estate, brokerage accounts, business interests, retirement accounts and other U.S. property as part of the acquisition. The key issues are German tax liability under Section 2 ErbStG, valuation under German law, asset allocation under the Germany–U.S. estate-and-gift-tax treaty and any available credit for U.S. estate or state taxes.
Section 2 ErbStG
A German-resident heir can be taxed on the worldwide inheritance
If the recipient has a residence or habitual abode in Germany at the time of the inheritance, unlimited German inheritance tax liability will generally apply. Germany then taxes the entire acquisition irrespective of where the individual assets are located.
A German-resident heir may therefore have to report U.S. real estate, brokerage accounts, bank accounts, business interests and rights under U.S. retirement arrangements on the German inheritance tax return.
Germany can also have unlimited taxing jurisdiction for other reasons, including the German status of the decedent.
Analysis
U.S. property should be reviewed asset by asset
Tax liability
Is the recipient or decedent a German resident for purposes of Section 2 ErbStG?
Identify the asset
Real estate, brokerage account, retirement account, business interest, receivable or trust-related right?
Valuation
What value must be used under German inheritance tax and valuation law?
Treaty & credit
Which country may tax, and can U.S. tax be credited against German inheritance tax?
Common asset categories
U.S. assets frequently encountered in German inheritance cases
U.S. real estate
A house, apartment, land or rental property in the United States is generally included in German inheritance tax where unlimited tax liability applies. Under Article 5 of the treaty, the United States can also tax as the situs state.
Brokerage accounts
Stocks, ETFs, bonds, money-market funds and other portfolio assets must be valued for German inheritance tax purposes and converted into euros. Their treaty treatment differs from that of real estate.
Bank accounts & cash
U.S. bank balances and other monetary claims can also form part of the taxable German acquisition. The relevant value is generally determined at the date of death.
IRA, 401(k) & other retirement plans
For death benefits from U.S. retirement accounts, it must first be determined whether and to what extent a taxable inheritance arises. Later distributions can create separate German income-tax consequences.
Corporation, LLC & partnership
For U.S. business interests, the entity must first be classified from a German tax perspective. Classification can affect valuation, treaty allocation and potential German relief provisions.
Trust interests & distributions
For a U.S. trust, it must be determined whether the beneficiary actually acquires assets on death, merely becomes a beneficiary or receives distributions only later. These events can be taxed differently under German law.
Retirement accounts
Inherited IRAs and 401(k)s require separate inheritance-tax and income-tax analyses
U.S. retirement accounts commonly raise two distinct German tax questions. First, the death of the account owner can create an inheritance-tax acquisition for the beneficiary. Second, later distributions from the account can be subject to German income tax.
U.S. income tax imposed on a later distribution is not automatically creditable against German inheritance tax. The German Federal Fiscal Court has expressly confirmed this for Federal Income Tax Withheld.
Valuation
U.S. assets are valued for German inheritance tax under German law
A value reported on a U.S. estate tax return or used in a U.S. probate proceeding is not automatically binding for German inheritance tax. German inheritance tax and the German Valuation Act apply.
The valuation date is generally the date of death
The acquisition is generally valued when German inheritance tax arises. Later market movements or changes in value do not replace the date-of-death value.
USD amounts must be converted into EUR
Dollar-denominated assets and liabilities must be translated into euros for German inheritance tax purposes. The exchange rate used should be documented consistently.
Publicly traded securities
Listed shares and funds are valued under German inheritance-tax valuation rules. The heir's later selling price is not the relevant measure.
Privately held businesses
U.S. LLCs, private corporations and other non-listed businesses can require a separate business valuation under German valuation rules.
A U.S. probate value is not automatically the German tax value
A U.S. estate inventory, appraisal or Form 706 can provide important evidence. It does not replace the analysis of whether that value is acceptable under German valuation law.
Differences can arise in particular for real estate, privately held companies, restricted interests and trust arrangements.
Estate & Gift Tax Treaty
The treaty allocates different U.S. asset categories differently
Germany and the United States have a separate treaty covering estate, inheritance and gift taxes. After determining the decedent's treaty residence, the individual assets must be classified under the applicable treaty provisions.
The relevant question is therefore not simply whether property is “in the United States,” but what type of property it is.
- Article 5: immovable property
- Article 6: permanent-establishment property
- Article 8: certain partnership interests
- Article 9: other property
- Article 11: foreign-tax credit relief
- Article 12: special estate and trust issues
Asset by asset
Treaty treatment depends on the specific type of property
U.S. real estate
The United States may tax as the situs state. Germany can also tax where the recipient is subject to unlimited German tax; Article 11 then coordinates double taxation.
Other property
Portfolio assets, receivables and other property can fall under the residual rule where no more specific treaty provision applies.
Partnership interests
For partnership interests, it may be necessary to determine whether underlying real estate or permanent-establishment property is attributed to the interest.
Trusts & estates
Trust and estate structures can create additional timing and legal-characterization issues under the treaty.
Article 11
U.S. estate tax can be creditable against German inheritance tax
If Germany and the United States tax the same acquisition or the same property, Article 11 can provide a credit for qualifying U.S. tax against German inheritance tax.
The credit is not calculated as a blanket deduction. The U.S. tax must be allocated to the relevant property and compared with the portion of German inheritance tax attributable to that property.
Certain taxes imposed by U.S. states can also become relevant under the special rules of Article 11.
BFH case law
U.S. income tax is not automatically creditable inheritance tax
In its judgment of June 15, 2016 – II R 51/14 – the German Federal Fiscal Court held that U.S. Federal Income Tax Withheld on a death-related payment was not creditable against German inheritance tax under either Section 21 ErbStG or the estate-and-gift-tax treaty.
In the specific case, the tax could nevertheless be deducted as a liability of the estate. The decision therefore illustrates the need to distinguish between a foreign-tax credit and a potential deduction as an estate liability.
Business property
U.S. LLCs and corporations must first be classified under German tax principles
The U.S. legal form alone does not determine German tax treatment. In particular, the German classification of an LLC can differ from its U.S. tax classification.
Before valuation and treaty allocation, it should therefore be determined whether Germany treats the entity as a corporation, partnership or another type of arrangement.
Corporation
For a conventional corporation, the main issue will generally be the valuation of the shares or ownership interest.
LLC
An LLC can require a German entity-classification analysis. A U.S. election as a disregarded entity, partnership or corporation is not automatically controlling in Germany.
Partnership
For partnership interests, German valuation and special treaty rules concerning underlying assets can both become relevant.
Trust property
For a U.S. trust, the first question is what the German beneficiary actually acquires
A trust beneficiary does not necessarily inherit the trust assets directly. The analysis depends on the beneficiary's legal rights, the trust instrument, applicable U.S. trust law and whether a legally enforceable property right arises upon the death of the settlor or another person.
Later distributions can independently trigger German gift tax. German income tax and Section 15 AStG can also become relevant.
Estate liabilities
U.S. debts and estate expenses can also matter for German inheritance tax
The analysis should not stop at the gross value of the U.S. assets. Mortgages, loans, certain tax liabilities and other obligations originating with the decedent can potentially qualify as deductible estate liabilities under German law.
Deductibility is determined under Section 10 ErbStG and German allocation rules. A deduction claimed on a U.S. estate tax return is not automatically accepted in Germany.
Mortgage on U.S. real estate
A debt economically connected with the inherited property can be relevant to the German taxable net acquisition.
Income tax liability of the decedent
In specific circumstances, unpaid income-tax liabilities originating with the deceased can qualify as deductible estate liabilities.
Documentation
Documents typically needed for U.S. assets
Estate Documents
Will, probate documents, letters testamentary or comparable evidence of the estate and the beneficiaries.
Asset Statements
Bank, brokerage and retirement-account statements as of the date of death or as close to that date as possible.
Real Estate Appraisals
Appraisals, purchase records, tax assessments and mortgage documentation for U.S. real estate.
Business Records
Operating agreements, stock ledgers, financial statements and valuation materials for LLCs, corporations or partnerships.
Form 706 & State Returns
Where available, the U.S. estate tax return and documentation relating to state estate or inheritance tax.
Trust Documents
Trust agreement, amendments, beneficiary designations and evidence of the beneficiary's legal rights.
Common mistakes
Issues frequently overlooked with U.S. assets in a German inheritance
Not reporting U.S. property in Germany
Unlimited German inheritance tax liability generally covers the worldwide acquisition.
Using U.S. values without review
A probate value or Form 706 value is not automatically the German tax value.
Treating all assets the same
Real estate, brokerage accounts, business interests, retirement accounts and trusts follow different legal rules.
Mixing estate tax and income tax
Income tax on a later distribution is not automatically creditable against German inheritance tax.
Classifying an LLC only under U.S. tax law
Germany classifies a U.S. LLC under its own entity-classification principles.
Treating a trust interest as direct ownership
For trusts, the beneficiary's legal position must be established before the German tax consequences can be determined.
Further guidance
Related topics
Frequently asked questions
U.S. assets and German inheritance tax
Do I have to pay German inheritance tax on U.S. assets if I live in Germany?
Do I have to report U.S. real estate in Germany?
Can I simply use the value reported on Form 706 for Germany?
How is a U.S. brokerage account valued for German inheritance tax?
How is an inherited IRA or 401(k) treated?
Can U.S. estate tax be credited against German inheritance tax?
What happens if I inherit a U.S. LLC?
How is a U.S. trust treated in a German inheritance?
Germany–U.S. tax advice
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