Inheritance Tax - Indian Inheritance and German Taxes

[expataachen]

Hi, I am an Indian citizen, residing and working in Germany where I pay taxes.
After my parents death, I will be inheriting their property and assets. India and Germany have a double taxation avoidance agreement. In India, all inheritance is tax free.
Will I have to pay Inheritance tax in Germany on my Indian assets, if I am a tax resident of Germany at the time of their death? Will it follow the same rates as the inheritance tax for German citizens?
For the property, is my understanding correct, that if I live in the property for 10 years after inheriting then I will not have to pay any tax in Germany? In this case, I will also no longer be a German resident, I assume as I will lose my residency permit for living outside Germany. Is there another way to avoid this estate tax?

[PandaMunich]

Hi, I am an Indian citizen, residing and working in Germany where I pay taxes.
After my parents death, I will be inheriting their property and assets. India and Germany have a double taxation avoidance agreement. In India, all inheritance is tax free.

No, there is no double taxation agreement regarding inheritance tax between Germany and India (you are thinking of the one regarding income tax).
Germany only has 6 DTA regarding inheritance tax in total: https://expertise.tax/en/faq-german-tax ... tance_gift

But with India not charging inheritance tax, there can be no double taxation, i.e. there is no need for a double taxation agreement (DTA), since all a DTA does is remove double taxation.

Will I have to pay Inheritance tax in Germany on my Indian assets, if I am a tax resident of Germany at the time of their death? Will it follow the same rates as the inheritance tax for German citizens?

Yes and yes.

For the property, is my understanding correct, that if I live in the property for 10 years after inheriting then I will not have to pay any tax in Germany?

No, only a family home in Germany, or in an EU country or in a EEA country would be free of inheritance tax, if you as their child continue living in it for over 10 years. And only the part of the family home that is up to 200m² living space. So if the family home is 300m², then only 2/3 (= 200m²/300m²) of its value would be exempt from German inheritance tax.

The legal basis for this is § 13 (1) Nr. 4c) ErbStG: https://www.gesetze-im-internet.de/erbs ... /__13.html

• 4c. der Erwerb von Todes wegen des Eigentums oder Miteigentums an einem im Inland oder in einem Mitgliedstaat der Europäischen Union oder einem Staat des Europäischen Wirtschaftsraums belegenen bebauten Grundstück im Sinne des § 181 Abs. 1 Nr. 1 bis 5 des Bewertungsgesetzes durch Kinder im Sinne der Steuerklasse I Nr. 2 und der Kinder verstorbener Kinder im Sinne der Steuerklasse I Nr. 2, soweit der Erblasser darin bis zum Erbfall eine Wohnung zu eigenen Wohnzwecken genutzt hat oder bei der er aus zwingenden Gründen an einer Selbstnutzung zu eigenen Wohnzwecken gehindert war, die beim Erwerber unverzüglich zur Selbstnutzung zu eigenen Wohnzwecken bestimmt ist (Familienheim) und soweit die Wohnfläche der Wohnung 200 Quadratmeter nicht übersteigt.
  Ein Erwerber kann die Steuerbefreiung nicht in Anspruch nehmen, soweit er das begünstigte Vermögen auf Grund einer letztwilligen Verfügung des Erblassers oder einer rechtsgeschäftlichen Verfügung des Erblassers auf einen Dritten übertragen muss.
  Gleiches gilt, wenn ein Erbe im Rahmen der Teilung des Nachlasses begünstigtes Vermögen auf einen Miterben überträgt.
  Überträgt ein Erbe erworbenes begünstigtes Vermögen im Rahmen der Teilung des Nachlasses auf einen Dritten und gibt der Dritte dabei diesem Erwerber nicht begünstigtes Vermögen hin, das er vom Erblasser erworben hat, erhöht sich insoweit der Wert des begünstigten Vermögens des Dritten um den Wert des hingegebenen Vermögens, höchstens jedoch um den Wert des übertragenen Vermögens.
  Die Steuerbefreiung fällt mit Wirkung für die Vergangenheit weg, wenn der Erwerber das Familienheim innerhalb von zehn Jahren nach dem Erwerb nicht mehr zu Wohnzwecken selbst nutzt, es sei denn, er ist aus zwingenden Gründen an einer Selbstnutzung zu eigenen Wohnzwecken gehindert;

• 4c. the acquisition by reason of death of ownership or co-ownership of a house or apartment located in Germany or in a member state of the European Union or a state of the European Economic Area within the meaning of Section 181 para. 1 nos. 1 to 5 of the Valuation Act by children within the meaning of tax class I no. 2 and the children of deceased children within the meaning of tax class I no. 2, insofar as the deceased used the property for their own residential purposes up to the date of inheritance or was prevented from using the property for their own residential purposes for compelling reasons, which is immediately intended for use by the purchaser for their own residential purposes (family home) and insofar as the living space of the property does not exceed 200 square metres.
  An heir cannot claim the tax exemption if he has to transfer the favoured property to a third party on the basis of a testamentary disposition by the deceased or a legal disposition by the deceased.
  The same applies if an heir transfers favoured assets to a co-heir as part of the division of the estate.
  If an heir transfers acquired favoured assets to a third party as part of the division of the estate and the third party transfers to this acquirer non-favoured assets acquired from the deceased, the value of the favoured assets of the third party is increased by the value of the transferred assets, but by no more than the value of the transferred assets.
  The tax exemption is cancelled with effect for the past if the acquirer no longer uses the family home for residential purposes within ten years of the acquisition, unless he is prevented from using it for his own residential purposes for compelling reasons;

Is there another way to avoid this estate tax?

Move away from Germany before your parents die.

If you take on German citizenship, move away (and do not keep a space in Germany) at least 5 years and one day before the first parent dies, since German citizens have a lagging 5 year gift and inheritance tax liability set down in § 2 (1) Nr. 1 b) ErbStG: https://www.gesetze-im-internet.de/erbstg_1974/__2.html

• (1) Die Steuerpflicht tritt ein
  ...
  deutsche Staatsangehörige, die sich nicht länger als fünf Jahre dauernd im Ausland aufgehalten haben, ohne im Inland einen Wohnsitz zu haben,

• (1) The tax liability arises
  ...
  German nationals who have not resided abroad for more than five years without having a residence in Germany,

Please note that if you move away to the USA as a German citizen, the tax liability period increases to 10 years, please see here: viewtopic.php?p=1356#p1356

[expataachen]

Thank you!
What would be the case if my parents signed over the property to me now while they are still living there? I assume that since it would be an asset in my name, even if there is no active income on it, I would still have to pay some tax?

[PandaMunich]

What would be the case if my parents signed over the property to me now while they are still living there? I assume that since it would be an asset in my name, even if there is no active income on it, I would still have to pay some tax?

You would have to pay gift tax, which is exactly the same as inheritance tax.
Please read my introduction to this topic: https://expertise.tax/en/faq-german-tax ... tance_gift