In Germany, unlimited inheritance tax applies if either (i) the deceased or (ii) the heir had or has a place of residence in Germany. If neither of these alternatives applies, limited inheritance tax liability may apply. According to Section 2 (1) No. 3 of the Inheritance Tax Act (“ErbStG”), if neither the deceased nor the heir has a residence in Germany, only the so-called domestic assets are subject to limited inheritance tax liability in the event of inheritance.
Domestic assets are determined in accordance with Section 121 of the Valuation Act (“BewG”). According to this, domestic assets include, in particular, real estate located in Germany, domestic business assets, and shareholdings in domestic corporations, provided that the shareholding amounts to at least 10% of the share capital or nominal capital. Claims are generally not considered domestic assets within the meaning of Section 121 BewG unless they are secured by domestic real estate. Domestic assets also include claims to the transfer of real estate located in Germany, provided that these claims are secured by entry in the land register.
According to Section 121 BewG, domestic assets specifically include:
1. domestic agricultural and forestry assets;
2. domestic real estate;
3. domestic business assets. Assets used for a business operated in Germany are considered as such if a permanent establishment is maintained in Germany or a permanent representative is appointed for this purpose;
4. shares in a corporation if the corporation has its registered office or place of management in Germany and the shareholder, either alone or together with other persons closely related to him within the meaning of Section 1 (2) of the Foreign Tax Act (“AStG”), as amended, holds at least one-tenth of the share capital or stock of the corporation directly or indirectly;
5. inventions, utility models, and topographies not covered by number 3 that are entered in a domestic book or register;
6. assets not covered by numbers 1, 2, and 5 that are transferred to a domestic business, in particular leased or rented to it;
7. Mortgages, land charges, annuities, and other claims or rights if they are directly or indirectly secured by domestic real estate, domestic rights equivalent to real estate, or ships registered in a domestic ship register. This does not include bonds and claims for which partial debentures have been issued;
8. Claims arising from participation in a commercial enterprise as a silent partner and from profit-participating loans, if the debtor has his place of residence or habitual abode, registered office or place of management in Germany;
9. Rights of use to any of the assets listed in numbers 1 to 8.
The above list in § 121 BewG is exhaustive. Bank account balances with a German bank, jewelry, gold coins, cars, or other movable property are therefore not considered domestic assets and are therefore not subject to limited inheritance tax liability.
If the estate does not contain any domestic assets, there is no limited tax liability. The heirs living in the USA, UK, France, Italy, Spain, Namibia, South Africa or any other countries outside of Germany are then not required to pay German estate tax or inheritance tax.