Germany

*Updated July 2018

Quick links

• Legal system
• Inheritance and succession
• Estate planning
• Taxation
• Residence and domicile
• Other relevant information

Legal system

Civil law.

top

Inheritance and succession

Succession

General principles (forced heirship/testamentary freedom) and key legislation: for estates of decedents passing away on or after 17 August 2015, the EU Succession Regulation 650/2012 applies. Then the decedent’s last habitual residence is the primary connecting factor with an option for a general choice of law in favour of the law of the country of which the decedent is a citizen. For estates of decedents having passed away before 17 August 2015, the decedent’s nationality is the connecting factor for principally determining the applicable inheritance law for the worldwide estate. Exceptions apply primarily in cases of foreign real estate, and if a foreign decedent made a choice of law limited to German real estate.

Forced heirship rules apply to testate succession. Forced heirs are the surviving spouse, the testator’s descendants or, if the testator leaves no descendants, his or her parents. The forced share is a monetary claim primarily against the heirs. The forced share amounts to half of the respective share under the rules on intestate succession. Donations made by the decedent principally during the last ten years prior to death are taken into account.

Family law and defined inheritance rules

Yes. The inheritance quota of the spouse depends on the spouses’ marital property regime. In general the spouse’s quota is a quarter of the estate if the decedent leaves descendants, one half if the descendent leaves parents, grandparents or their descendants or brothers and sisters, and otherwise 100 per cent. In case of separation of property (Gütertrennung) and if the decedent leaves a spouse and one or two children, the spouse and each child are entitled to the same quota. In case of community of accrued gain (Zugewinngemeinschaft) the surviving spouse can choose between equalisation of accrued gains or an enhancement of the quota of a quarter.

Probate process

The estate vests with the heirs directly and automatically by operation of law. Probate proceedings only need to be initiated by the beneficiaries or executors if they require a certificate of inheritance or letters testamentary. Usually, this is not necessary if the will was notarised in Germany or if assets such as German real estate or shareholdings in German companies do not form part of the estate. Powers of attorney granted by the decedent may remain valid beyond death and may enable beneficiaries to transfer estate assets without probate. The appointment of an executor or administrator is not mandatory. Long-time executorships lasting several years or decades are common to administer estates especially if beneficiaries are minors or young adults.

Acceptance of the inheritance is presumed, unless heirs renounce the inheritance within six weeks (six months if residing abroad) by authenticated deed addressed to the probate court. Heirs are personally answerable for the decedent’s worldwide liabilities. To prove their legal status in another member state of the EU, heirs can apply for a European Certificate of Succession.

Mental capacity

Germany has ratified the Hague Convention on the International Protection of Adults of 13 January 2000.

A general power of attorney enables family members or friends to act in case of mental incapacity of the principal and avoids formal care mandated and supervised by court.

If the principal wishes such formal care they are able to appoint a caretaker in a health care proxy. The principal can also establish a patient’s provision, which includes wishes in case of serious illness.

top

Estate planning

Use of trusts in estate planning

The German legal system does not recognise trusts as such. Instead, courts interpret and translate trusts into structures the German legal system is familiar with on a case-by-case basis attempting to reach the legal results most closely comparable to the effects under foreign trust law. There are statutory rules on the taxation of trusts and other foreign structures. Due to the legal difficulties and their usually adverse tax effects, trusts are rarely used for estate-planning purposes for German resident beneficiaries.

Use of foundations in estate planning

Non-profit and private benefit foundations are commonly used for estate planning purposes. Typical reasons are the preservation of the family wealth, a decedent without children or other successors, or avoidance of exit taxation. Starting on 1 October 2017, foundations need to report beneficial ownership information to a central transparency database (Transparenzregister). This measure was intended to transpose the EU Fourth Anti-Money Laundering Directive into German law.

Types of entities

• Non-profit foundations: similar to a corporation, but neither the founder nor any other person is a shareholder and the foundation is for non-profit purposes.
• Private benefit foundation: similar to a corporation, but neither the founder nor any other person is a shareholder.
• Family companies or associations: often used to extend the flexibility of the legal toolkit in order to increase influence of the principal and to create an entity which may convey legal rights and obligations surviving the principal.
• Long-term executorships: subject to German inheritance law, executors may be appointed not only for the purpose of winding up an estate, settling debts and distributing assets among the beneficiaries, but also to administer the estate for years or decades or for the lifetime of beneficiaries, for example, if beneficiaries are minors or have certain disabilities.
• Subsequent heirs: subject to German inheritance law, the testator may name subsequent heirs inheriting the estate or certain estate assets once the initial heirs have passed away or any other condition or precedent defined by the testator applies.

top

Taxation

Tax residence

Residents are liable to tax on the basis of worldwide income. Individuals are resident if Germany is their home (Wohnsitz), place of dwelling or habitual place of abode (gewöhnlicher Aufenthaltsort) that is a more or less continuous presence in Germany for more than 183 days a year), regardless of their citizenship. Secondary or holiday homes often suffice to make individuals tax-resident by domestic German standards. Affected individuals must rely on treaty protection, which often is unavailable for gift and inheritance tax (due to the vast absence of treaties) and for foreign-controlled corporations, trusts and foundations (due to treaty overrides).

An entity is considered resident if either its legal seat or place of management is in Germany.

Personal income tax rates

Individual income tax is imposed at progressive rates. Starting at EUR8,820 (married couples EUR17,640), the marginal rate rises from 14 per cent to 42 per cent for income over EUR54,058 (married couples EUR108,116). Income over EUR256,304 (married couples EUR512,608) is subject to a 45 per cent tax. For jointly assessed spouses, annual taxable income levels are doubled.

Employers are required to withhold pre-payment of the final income tax (‘wage tax’) from employees’ salaries. A 5.5 per cent solidarity surcharge is imposed on personal income tax (regardless of wage tax or of tax assessments).

Corporate income tax rates

Corporate income tax is imposed at a rate of 15 per cent on taxable income (regardless of distributed or retained).

A 5.5 per cent solidarity surcharge is imposed on corporate income tax (and withholding tax payments). The effective tax rate (income tax rate and solidarity surcharge) is 15.825 per cent.

Corporations are subject to tax on worldwide business income. At the company level, capital contributions in connection with capital increase (regardless whether in return for shares or other membership rights) or an increase of company’s capital reserve are exempt. At the shareholder level, capital repayments that do not include any dividend component are tax exempt. Furthermore (at shareholder level) dividends derived by corporate shareholder (resident in Germany) are, in general, tax exempt up to 95 per cent (of gross dividends); this is granted at a minimum participation requirement of more than 10 per cent but irrespective of the shareholding (direct or indirect), source or holding period.

Taxable income of corporations means the total income on worldwide base after deduction of expenses in connection with business and earnings. Dividend payments are not qualified as deductible expenses, whereas royalties and interest (within thin capitalisation rules) are qualified as business expenses. Expenses for accruing tax-exempt income is also not qualified as deductible business expenses. Directors’ remunerations are deductible expenses as far as they are not treated as so-called hidden profit distribution (verdeckte Gewinnausschüttung, vGA) of the company to its shareholder (and director).

The German thin capitalisation rule limits deduction of interest payments (expenses) up to 30 per cent of company’s earnings before interest, taxes depreciation and amortisation (EBITDA). Nevertheless, the thin capitalisation rule grants a ‘safe haven’ of EUR3 million for exceeding interest expenses (in relation to interest earnings) before the 30 per cent limitation applies. Both non-deductible expenses and unused EBITDA may respectively be carried forward. Please note, that the 30 per cent limitation is only applicable to group companies (German group concept, Organschaft). Moreover, that 30 per cent limitation is not applicable to group companies if the equity ratio regarding the total assets of a company is at least equal to or even higher than the same ratio for the group to which it belongs (so-called escape clause).

Capital gains tax

Regarding capital gains (from privately held property), irrespective of whether long- or short-term, there is a flat tax (Abgeltungssteuer) with a uniform rate of 25 per cent. A ‘solidarity’ surcharge of 5.5 per cent is levied on computed taxes.

The same flat tax applies to income from capital investments (such as dividends, interest, certificates/financial innovations (under certain conditions), proceeds from participating loans or silent partnerships). There is an option for individual tax rate treatment. Income-related expenses are not deductible. This tax is deducted at source. Foreign withholding tax will be credited. The corporate income tax rate for both retained and distributed profits is 15 per cent (plus trade tax, 14 per cent and solidarity surcharge). Dividends and other profit distributions paid by German resident companies are subject to creditable 25 per cent withholding tax. Withholding tax on interest and income from silent partnerships is 25 per cent as well as interest paid by a bank. Capital gains of corporations are treated as ordinary income. Capital gains of corporations derived from sales of shares in corporations are generally exempt from corporation income tax. Please note in this context, that capital gains on shares for trading purposes which are held by banks and financial enterprises and financial service institutions are not tax exempt. Individuals and corporations are required to file tax returns. Usually, the tax year is the calendar year.

Non-residents taxable on

• Business profits.
• Remuneration for services.
• Dividends or income from silent partnership.
• Interest from resident payers.
• Rent from immovable property.
• Royalties.

Non-resident companies are subject to German corporate income tax at the same rates as resident companies if they derive German-source income that is not subject to a withholding tax but is calculated as the difference between profits and related expenses.

Withholding tax rate (non-treaty)

Dividends: the typical withholding tax rate is 25 per cent, the rate may be reduced, for non-residents, to 15 per cent if the recipient is qualified under German anti-treaty-shopping rules. The solidarity surcharge of 5.5 per cent applies (additionally).

Interests: the standard withholding tax rates are 0 per cent/15 per cent/25 per cent. Interest on loans secured by immovable property located in Germany may be subject to 15 per cent. The solidarity surcharge of 5.5 per cent applies (additionally).

Royalties: the standard withholding tax rate on royalties is 15 per cent. The solidarity surcharge of 5.5 per cent applies (additionally).

Taxation at death

German inheritance law is governed by the doctrine of universal succession. As a consequence the heir(s) acquire(s) title to the decedent’s property and become liable for his or her debts at the time of death. Generally, no executor or administrator will be appointed, and there will be no substantial probate proceedings.

Germany has a unified Inheritance and Gift Tax Act. At death, inheritance tax (IHT) is imposed. The basis of assessment is the benefit accruing to the transferee (beneficiary/heir).

Beneficiaries resident in Germany are generally subject to unlimited taxation to their transfers of worldwide net property (at death). Beneficiaries not resident will be subject to German IHT only upon the transfers of German-situate (according to German domestic law) net property (at death), that is real estate, agricultural and forestry property, assets pertaining to a permanent establishment, shareholdings (at least 10 per cent of the registered share capital, directly or indirectly) in German-resident corporations.

Table: Rates of inheritance tax

In addition to asset- and purpose-related exemptions (among others for agricultural, forestry and business (operating) assets, certain real estate, certain donations (charitable, to political parties), family homes) and reliefs there are personal allowances. As a reaction to recent case law from the Federal Constitutional Court, the law regarding tax exemptions for business (operating) assets has been comprehensively amended. There is now a crucial distinction between acquisitions worth up to EUR 26 million, and those above the EUR 26 million threshold. Persons having acquired up to EUR 26 million can still choose the basic tax relief with a tax exemption of 85 per cent or a full tax relief with a tax exemption of 100 per cent. The requirements, however, are now stricter. The tax exemption requires continuation of the business for a minimum of five years for the 85 per cent exemption, and seven years for the 100 per cent exemption. If there are more than five employees, the aggregate wage costs during the aforementioned periods have to amount to 400 (700) per cent of the average wage costs within the last five years before death. Different figures apply for businesses with more than five but no more than ten employees, and with more than ten but not more than 15 employees, respectively.

If the heir’s acquisition is worth more than EUR26 million, they can apply for a tax abatement if they can prove that they are is unable to pay the tax from their available assets. Available assets are defined as half of the sum of the inheritance’s value and the heir’s previously owned assets. Further, deferment rules have been introduced, and conditions regarding the aggregated wage sum, a continued ownership time (Behaltensfrist), and later acquisitions of available assets apply. This new test is the so-called financial ability test (Verschonungsbedarfsprüfung), which is aimed at granting wide-ranging exemptions only to such persons who require them.

Alternatively, the heir can choose a modification to the 85 per cent exemption. The 85 per cent exemption rate is reduced by one percentage point for every EUR750,000 above the EUR 26 million threshold.

In addition to one of the options chosen, the heir can also choose to get an additional deduction of 30 per cent of assets transferred. This requires the company’s articles of association to provide for a limitation of dividend payouts, of transfer of shares rules, and of severance payments. The non-operating assets has to be 50 (90) per cent and less. For smaller business (operating) assets up to EUR3 million a further tax exemption to a maximum of EUR150,000 exists.

The Government’s draft bill provides the test of aggregate wage cost starting with four employees, with stepped requirements regarding the aggregate wage costs. The transfer of non-operating assets within the transfer of the operating business assets should be taxable at a lower percentage of non-operating assets. If the heir is worth more than EUR26 million (in special cases EUR52 million) the heir can choose between a stepped reduced percentage of tax exemption or a disclosure of the private wealth accompanied by paying the IHT involving 50 per cent of the private wealth (so-called financial ability test, Verschonungsbedarfsprüfung).

Table: Allowances inheritance tax

Other taxes

The German Gift tax is similar to German inheritance tax. As mentioned above, Germany has a unified tax system. A wealth tax is not levied in Germany. There is a real property tax on the assessed standard value of real property imposed. The rate varies by municipality within a range of 0.5 per cent to 2.8 per cent. On 10 April 2018, the German FCC declared the assessment of the standard value unconstitutional and required new regulations by the end of 2019. A real estate transfer tax on sales and transfers of real property (that includes buildings and certain transactions that are deemed to be equivalent to transfers of real property), that is assignment of at least 95 per cent of the shares in a German or foreign company that holds title to domestic (German) real property (with exceptions for groups). This real estate transfer tax is levied on the purchase price of the real property (or on the assessed standard value of the real property, that is in the certain transactions, mentioned above). There are different tax rates applicable, depending in which of the German states the real property is located:

• 3.5 per cent rate for real estate in Bavaria and Saxony;
• 4.5 per cent rate for real estate in Hamburg;
• 5.0 per cent rate for real estate in Baden-Wuerttemberg, Bremen, Mecklenburg-
West Pomerania, Lower Saxony, Rhineland-Palatinate, Saxony-Anhalt;
• 6 per cent rate for real estate in Berlin, Hesse;
• 6.5 per cent for real estate in Brandenburg, North Rhine-Westphalia, Saarland, Schleswig-Holstein, Thuringia.

Tax treaties

About 100 double-tax treaties with respect to taxes on income and capital are in force (the treaty with Jersey is limited). Additionally, there are six double-tax treaties on taxes on estate, inheritance and gift.

Tax information exchange agreements

In addition to the tax treaties for taxes on income and capital and estate, inheritance and gift there are 31 TIEAs in force (www.bundesfinanzministerium.de/Web/DE/Themen/Steuern/Internationales_Steuerrecht/Staatenbezogene_Informationen/staatenbezogene_info.html).

top

Residence and domicile

Special rules on becoming resident

• Residents are all individuals whose place of residence (Wohnsitz) or customary place of abode (gewöhnlicher Aufenthalt) is in Germany, in consequence they are subject to unlimited tax on worldwide income.
• Residence is defined as a dwelling that a person has at their disposal under circumstances giving rise to the assumption that the individual will retain and use this dwelling from time to time. A secondary or holiday home may suffice to constitute a tax residence.
• Customary place of abode means the place where a person is present under circumstances that demonstrate that his presence is not only temporary. Generally, a customary place of abode will be deemed to exist if more than six months are spent in Germany for a consecutive six-month period (short interruptions being without detrimental effect) and unless the stay is for vacation or visiting purposes only.

Special rules on ceasing residence

Cessation of place of residence and customary place of abode can lead to exit taxation. Downstream taxation is possible.

Domicile concept for gifts and inheritance

If the deceased or donor or the beneficiary is a resident of Germany when the inheritance or gift is made, all property is subject to tax, whether located within or outside Germany.

Taxation of holdings by non-residents on

• Gifts: if the donor and the beneficiary are non-residents, the tax is limited to property located in Germany (if the donor is shareholder of a German corporation, the direct or indirect involvement has to be 10 per cent or more).
• Death: in case of death it is, for the deceased, exactly the same as in the case of gifts for the donor.

Reporting/auditing requirements

Yes. Generally, the donor or the beneficiary has to report the gift/inheritance to the financial authorities for gift/inheritance tax within three months. On request the beneficiary has to file a gift/inheritance tax return.

top

Other relevant information

Asset protection laws

No. There is no asset protection law in Germany, but some different rules can be used for asset protection planning.

Foreign currency restrictions

Yes. Cash over EUR10,000 must be registered when crossing the border.

Foreign ownership restrictions

No.

AML/due diligence and other requirements and regulatory procedures for advisors

• To establish a trust: the entity may need to report beneficial owners to the central database (Transparenzregister).
• For incorporation: it depends on the type of incorporation as to what requirements and regulatory procedures are necessary.
• To open a bank account: the beneficial owner has to identify himself.

Regarding AML, see next section.

Other points of interest

Money laundering is a criminal offence. Banks, financial service institutions, insurance companies, investment companies and attorneys, tax advisors, auditors, estate agents etc. must keep records about personal details especially when establishing a business relationship and in the case of transactions of at least EUR10,000.

Germany has now incorporated the EU Fourth Anti-Money Laundering Directive into German law. One of the changes in Germany’s Anti-Money Laundering Act is the establishment of a central database of beneficial owners (www.transparenzregister.de). Entities already listed in other public registers are exempt. Such registers include the commercial register and other registers for corporations and associations. Thus, foundations and trusts must now report beneficial owners.

Key resources for further information

WEBSITES

• Federal Ministry of Justice: www.bmjv.de
• Federal Ministry of Finance: www.bundesfinanzministerium.de

top

STEP branches in Germany

There is one STEP branch in Germany.

• STEP Germany

Firms in Germany

Find firms in Germany using the Firm Search: Search now

Members in Germany

Find STEP members in Germany using the Member Search: Search now