BFH, decision of 20 September 2022 - II B 2/22- (German inheritance taxation in the case of residence in Germany of an heir with US citizenship)

Central standards: ErbStG § 2 para. 1 no. 1; DBA USA-ERB 2000 Art. 4 and 11

Guiding principle:

Art. 4 para. 3 DBA USA-ERB 2000 is also not applicable to the non-household acquirer if Germany bases its right of taxation on the acquirer's place of residence in accordance with Art. 11 para. 1 letter b DBA USA-ERB 2000.

Facts of the case:

I. The plaintiff and complainant (plaintiff) is a citizen of the USA without being a German citizen at the same time. She has been resident in Germany since 15 September 2011. Upon the death of her aunt, who died on 14 February 2015 and was also a US citizen and resident there, the plaintiff acquired a claim to payment of a death benefit from a pension plan. The defendant and respondent (FA) assessed inheritance tax against the plaintiff. The appeal and lawsuit were unsuccessful (Tax Court Berlin-Brandenburg of 17 November 2021 - 14 K 14038/20).

In the opinion of the tax court, the personal tax liability from § 2 para. 1 no. 1 lit. a ErbStG is not excluded by the agreement between the Federal Republic of Germany and the United States of America for the avoidance of double taxation in the area of estate, inheritance and gift taxes (as amended by the decree of 21 December 2000 - DBA USA-ERB 2000, BGBl. 2001 II 65). German taxation was permissible in accordance with Art. 11 para. 1 letter b DBA USA-ERB 2000, as the plaintiff had a residence in Germany within the meaning of Art. 4 DBA USA-ERB 2000. Art. 4 para. 3 DBA USA-ERB 2000 was only applicable to the deceased and the family members belonging to his household.

With its appeal against the non-admission of the appeal, the plaintiff asserts the fundamental importance of the case pursuant to Section 115 para. 2 no. 1 FGO. It is to be clarified whether Art. 11 para. 1 letter b in conjunction with Art. 4 para. 3 DBA USA-ERB 2000 is to be applied in the case of an acquirer with US citizenship moving to Germany.

For the reasons:

4 II The complaint is (...) at least unfounded.

5 1. a case is of fundamental importance if the legal question relevant to the assessment of the dispute affects the abstract interest of the general public in the uniform development and application of the law. The legal question must require clarification in the specific case and be capable of clarification in future appeal proceedings. A legal question requires clarification if there is uncertainty regarding its answer. By contrast, a legal question requiring clarification is not raised if the legal question in dispute can obviously be answered in the same way as the tax court did, i.e. the legal situation is clear (established case law, e.g. BFH of 17 January 2022 - II B 49/21, ZEV 2022, 301 para. 6 with further references).

6 2 Contrary to what her obviously overly broadly formulated question suggests, the plaintiff would like to have the fundamental question answered as to whether Art. 11 para. 1 letter b in conjunction with Art. 4 para. 3 DBA USA-ERB 2000 is also applicable in the case of the move to Germany of an acquirer with US citizenship if the acquirer is not a family member of the household. The tax court obviously answered this question correctly in the negative and logically recognised that the plaintiff's acquisition was subject to German taxation.

Unlimited inheritance tax liability of the claimant as a resident

7 a) Pursuant to § 2 para. 1 no. 1 sentence 1, 2 letter a ErbStG, the plaintiff is deemed to be a resident of Germany due to her residence in Germany and as such is subject to unlimited inheritance tax. The DBA USA-ERB 2000 does not preclude taxation of the Plaintiff's acquisition in Germany.

8 The wording of the DBA USA-ERB 2000 is unambiguous. Art. 11 para. 1 letter b in conjunction with Art. 4 para. 3 DBA USA-ERB 2000 does not preclude a beneficiary who was resident in Germany at the time of the deceased's death within the meaning of Art. 4 DBA USA-ERB 2000 from being taxed under German law. Pursuant to Art. 4 para. 1 DBA USA-ERB 2000, the client had a residence under treaty law both in the USA (by virtue of nationality, Art. 4 para. 1 letter a DBA USA-ERB 2000) and in Germany (by virtue of actual residence, Art. 4 para. 1 letter b DBA USA-ERB 2000). According to Art. 4 para. 2 letter a DBA USA-ERB 2000, the contracting state of their permanent residence - Germany - is deemed to be their place of residence, subject to Art. 4 para. 3 DBA USA-ERB 2000.

Inheritance tax benefits under the DTA only for family members belonging to the deceased's household

9 b) If, at the time of death (or the gift), an individual was a national of one Contracting State without simultaneously being a national of the other Contracting State, had a domicile in both Contracting States on the basis of Art. 4 para. 1 DBA USA-ERB 2000 and had a domicile in the other Contracting State on the basis of Art. 4 para. 1 DBA USA-ERB 2000 for a period of no more than 10 years, the residence of this person and the family members belonging to his/her household who fulfil the same requirements is deemed to be in the contracting state of which they were nationals, irrespective of Art. 4 para. 2 DBA USA-ERB 2000 (Art. 4 para. 3 DBA USA-ERB 2000). However, in cases of inheritance, the provision only applies to the deceased and, among the heirs, to their family members belonging to the household, but not to other heirs. Art. 4 para. 3 DBA USA-ERB 2000 makes an introductory and central link to the time of death of the natural person in question. This can only be the testator and not the heir.

No other result due to other methods of interpretation

10 c) Methods of interpretation that go beyond the wording do not lead to a different result.

11 aa) This applies in particular to the system of the agreement. The plaintiff's assumption is incorrect that the reference in Art. 11(1)(b) DBA USA-ERB 2000 would be largely meaningless if Art. 4(3) DBA USA-ERB 2000 did not also cover the acquirer. The reference is not limited to the paragraph mentioned, but extends to the whole of Art. 4 DBA USA-ERB 2000, in particular to the general rules for determining residence in its para. 1 and 2. Should only a small scope of application remain for the application of para. 3 in particular within the framework of the reference, this would not be contrary to the system. Moreover, it is not certain whether the plaintiff's assumption that the heirs are rarely members of the household is correct.

12 bb) Nothing to the contrary emerges from the memorandum to which the plaintiff refers. This memorandum refers to the agreement between Germany and the USA for the avoidance of double taxation in the area of estate, inheritance and gift taxes (of 3 December 1980, Federal Law Gazette 1982 II 847), the predecessor of the current DTA USA-ERB 2000. It is part of the draft of the approval act pursuant to Art. 59 para. 2 of the Basic Law for the agreement at that time (BT-Drs. 9/1357, memorandum, p. 18 et seq.). Insofar as such a memorandum can be considered as an aid to interpretation, it could also be used for the current agreement, as Art. 4 para. 3 and Art. 11 para. 1 letter b of the agreement at the time (apart from the fact that the current 10-year period was only 5 years) had the same wording as today.

13 However, the content of the memorandum does not support the plaintiff's interpretation. The plaintiff quotes the memorandum incompletely. It is correct that under the description of the most important effects of the agreement on international succession cases, it is formulated that a special regulation applies to testators or heirs who have moved their place of residence from one state to the other five years before the succession (II.4. p. 1, BT-Drs. 9/1357, 19). Already at this point, however, the memorandum continues (II.4. p. 2) that the inheritance is treated for tax purposes as if the deceased had been resident solely in the state of his nationality at the time of death, without even mentioning the heirs. The explanatory notes to the individual articles of the Agreement state even more clearly that Art. 4 para. 3 contains a special „nationality rule“ for deaths within 5 years of a change of residence (III., on Art. 4, para. 4 p. 1, BT-Drs. 9/1357, 20); the rule applies equally to the deceased and the family members belonging to their household (III., on Art. 4, para. 4 p. 3). These further explanations correspond to the text of the Agreement. It can be inferred from them that the wording chosen in II.4. p. 1, which refers generally to the heirs, is merely imprecise and does not claim any substantive meaning.

14 cc) The Act approving the current agreement, the Act on the Protocol of 14 December 1998 amending the Agreement signed in Bonn on 3 December 1980 between Germany and the USA on the avoidance of double taxation in the field of estate, inheritance and gift taxes (dated 15 September 2000, Federal Law Gazette 2000 II 1170), does not provide any basis for the interpretation of the plaintiff. 15.9.2000, BGBl. 2000 II 1170), nothing follows for the interpretation of the plaintiff. According to Art. 3 of this law, § 2 para. 1 no. 1 sentence 1, 2 letter b ErbStG is applied to the persons covered by the protocol with the proviso that a period of 10 years applies instead of the period of 5 years stated therein. However, the mere adaptation of the period provided for in national law to the new agreement does not allow any conclusion to be drawn as to how the place of residence to which the period relates is to be determined. The reference to „the persons covered by the Protocol“ rather clarifies that the question of who is affected by the extension of the time limit is not regulated in the Consent Act, but in the Protocol.

15 dd) The same applies to the statement that the plaintiff takes from the „Explanation of Proposed Estate and Gift Tax Treaty between the United States and the Federal Republic of Germany“. The plaintiff provides neither the source nor the legal nature of this document, which is possibly an official announcement by the USA. It is irrelevant to what extent it can be an aid to interpretation. A statement that the ten-year rule should solve the vast majority of dual residence cases does not support the plaintiff's legal opinion. A solution also lies in the solution that the plaintiff does not favour.

16 ee) Finally, the extent to which it would be permissible to treat the cases of relocation differently from the cases of departure can be left open. In any case, in its judgement of 26 June 2001 - 13 K 173/99 (BeckRS 2001, 21010554), the Baden-Württemberg tax court interpreted the provisions of the agreement in the same way in a case of departure.