I. Facts of the case

The BFH ruled on an acquisition due to death (Erwerb von Todes wegen) from 2013. The claimant is the niece of the decedent, who died in 2013. Neither the claimant nor the decedent had a domicile or habitual residence in Germany, so they were not subject to unlimited inheritance tax liability under § 2 para. 1 no. 1. In this case, foreign testators and heirs may be subject to limited tax liability pursuant to § 2 para. 1 no. 3 German Inheritance Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz – ErbStG), provided that domestic assets within the meaning of § 121 German Valuation Act (Bewertungsgesetz – BewG) are inherited. Pursuant to § 121 no. 1 BewG, domestic assets include, in particular, domestic real property.
The decedent bequeathed to the claimant a co-ownership share in a property located in Germany. The tax office then assessed inheritance tax against the claimant in a notice dated 2 March 2015. The claimant objected to the assessment on the grounds that she was not subject to limited tax liability in Germany and, in particular, that the bequest did not constitute domestic real estate.
The claimant was initially unsuccessful on this ground. The Munich Tax Court dismissed the action. The acquisition of domestic real estate would also be deemed to have occurred if the real estate was (only) bequeathed, as the bequest provides the claimant with a co-ownership share in the real estate.

II. Decision

The BFH did not agree with this reasoning. Contrary to the assumption of the Fiscal Court, the “claim to transfer of the co-ownership share” in the domestic real estate acquired by bequest was not subject to the limited inheritance tax liability pursuant to § 2 para. 1 no. 3 sentence 1 ErbStG in conjunction with § 121 BewG.
As always in inheritance tax law, the BFH uses the standards of civil law for its reasoning.
Unlike in the case of acquisition on death by inheritance, the legatee does not enter into the legal positions of the decedent upon inheritance. Due to the universal succession stipulated in § 1922 German Civil Code (Bürgerliches Gesetzbuch – BGB), the assets pass to the heir as a whole. Consequently, the heir assumes all the legal positions of the testator without any further intermediate steps. The legatee, on the other hand, merely receives a claim under the law of obligations against the heir for the provision of the legacy (§ 1939 BGB).
According to § 3 I no. 1 ErbStG, acquisition by inheritance (§ 1922 BGB) or by bequest (§§ 2147 ff. BGB) is deemed to be acquisition due to death. In cases where there is no unlimited tax liability according to § 2 I no. 1 or no. 2 ErbStG, the tax liability arises according to § 2 I no. 3 p. 1 ErbStG for the acquisition of assets consisting of domestic assets within the meaning of § 121 BewG (limited tax liability). Domestic assets are exhaustively regulated in § 121 BewG. Pursuant to § 121 no. 2 BewG, this also includes domestic real estate.
However, with the bequest, the claimant only received a claim against the heir for the transfer of a co-ownership share at the time when the inheritance tax arose (pursuant to § 9 ErbStG at the time of the inheritance). In the opinion of the BFH, the mere claim under the law of obligations to the transfer of real property, which the bequest represents, is not covered by § 121 BewG, and as such does not represent domestic real property. An extended interpretation of § 121 BewG is out of the question, since the chosen legal formulations are conclusive. Overall, the real estate thus passes to a foreign heir completely free of inheritance tax, because the German heir can deduct the burden of the bequest from his enrichment pursuant to § 10 para. 2 no. 2 ErbStG.

III. Conclusion and further references

The BFH also applies the strict civil law demarcation of inheritance tax facts equally to the detriment of the taxpayer. Thus, in its ruling of 29 November 2017 – II R 14/16, the BFH already rejected the tax exemption for family homes if only the right to obtain ownership is acquired: The acquisition due to death by the surviving spouse of a claim to procure ownership of a family home secured by a priority notice of conveyance is not exempt from inheritance tax under § 13 para. 1 no. 4b sentence 1 ErbStG.
For the case discussed in this article, however, there is – at least until the legislator reacts to this case law – scope for structuring the acquisition due to death of domestic real property and foreign testators and beneficiaries. The acquisition of domestic real property is currently not subject to tax if

• both the testator and the beneficiary are not already subject to unlimited tax liability, and
• the beneficiary receives the domestic real property as a legatee, not as an heir.

However, it should be ensured that the foreign inheritance law statute has the same legal consequence for legacies as the legacy under German inheritance law. The decisive factor is that the beneficiary does not take over the legal position of the decedent at the time of the inheritance (Universalsukzession), but merely receives a claim under the law of obligations for the provision of a legacy against the heir.