Anyone who lives abroad and inherits or receives as a gift a property in Germany from a relative who also lives abroad often assumes that they are entitled in full to the well-known allowances of EUR 400,000 for children or EUR 500,000 for spouses. Since mid-2017, however, this has as a rule no longer been the case for the inheritance tax allowance under limited tax liability (beschränkte Steuerpflicht): under Section 16 (2) of the German Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG), the personal allowance is reduced proportionally, namely in the ratio of the assets that Germany may not tax to the total acquisition over the last ten years. This article explains when limited tax liability applies, which assets are covered, how the reduction is calculated and what is often overlooked in practice (legal position as at September 2026).
Unlimited or Limited Tax Liability: The Decisive Distinction
German inheritance and gift tax is an inheritance acquisition tax (Erbanfallsteuer): what is taxed is the enrichment of each individual acquirer, and the allowance and tax rate depend on his or her relationship to the deceased or donor. The preliminary question is to what extent Germany may tax at all. This is governed by Section 2 (1) ErbStG.
Unlimited Tax Liability under Section 2 (1) No. 1 ErbStG
Unlimited tax liability exists if the deceased at the time of death, the donor at the time the gift is made or the acquirer at the time the tax arises is a resident (Inländer). The entire acquisition is then subject to German tax, regardless of where the assets are located, and the full allowance under Section 16 (1) ErbStG applies.
Under Section 2 (1) no. 1 sentence 2 ErbStG, residents are in particular natural persons who have a residence or habitual abode in Germany. Even a dwelling in Germany that has been kept and can be used at any time can establish a residence. How residence and habitual abode are distinguished for tax purposes is covered in our article on habitual abode in German tax law.
Extended Unlimited Tax Liability: The Five-Year Period for German Nationals
Under Section 2 (1) no. 1 sentence 2 (b) ErbStG, German nationals who have not been permanently abroad for more than five years without having a residence in Germany remain residents. If an emigrated German national dies within these five years, or an emigrated German acquirer inherits within this period, there is unlimited tax liability with the full allowance, but also with access to worldwide assets. Whether you remain a German national when emigrating, which is what this rule is linked to, is explained in our article on keeping German citizenship when emigrating. Under point (c), a special rule applies to employees of the German public service abroad, irrespective of the five-year period.
Limited Tax Liability under Section 2 (1) No. 3 ErbStG
If none of the persons involved is a resident, limited tax liability applies. It covers only the acquisition that consists of domestic assets (Inlandsvermögen) within the meaning of Section 121 of the German Valuation Act (Bewertungsgesetz, BewG) or includes a claim to the transfer of such assets. Everything else, in particular assets abroad, is disregarded from a German perspective.
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| Scenario | Tax liability | Scope | Allowance |
|---|---|---|---|
| Deceased/donor or acquirer with residence or habitual abode in Germany | unlimited (Section 2 (1) no. 1 (a)) | worldwide assets | full (Section 16 (1)) |
| German national abroad for no more than five years without a residence in Germany | extended unlimited (Section 2 (1) no. 1 (b)) | worldwide assets | full (Section 16 (1)) |
| None of the parties is a resident | limited (Section 2 (1) no. 3) | only domestic assets under Section 121 BewG | reduced proportionally (Section 16 (2)) |
| Limited tax liability plus the requirements of Section 2 AStG in the person of the deceased/donor | extended limited (Section 4 AStG) | domestic assets plus further domestic items | reduced for the domestic assets (Section 16 (2)); unresolved for the additional part under Section 4 AStG |
What Counts as Domestic Assets and What Does Not
Section 121 BewG contains an exhaustive list. Not everything that is physically located in Germany is therefore a domestic asset. The following are covered in particular:
- domestic agricultural and forestry assets (no. 1),
- domestic real property, i.e. land, houses and condominium flats (no. 2),
- domestic business assets with a permanent establishment or permanent representative in Germany (no. 3),
- shares in a corporation with its registered office or place of management in Germany if the shareholder, alone or together with related parties within the meaning of Section 1 (2) of the German Foreign Tax Act (Außensteuergesetz, AStG), holds at least one tenth (no. 4),
- registered domestic intellectual property rights, assets made available to a domestic business, and silent partnerships and profit-participating loans against domestic debtors (nos. 5, 6 and 8),
- receivables secured directly or indirectly by domestic real property, for example via a land charge (Grundschuld), with the exception of bonds (no. 7),
- rights of use, such as a usufruct (Nießbrauch), in the aforementioned items (no. 9).
As a rule, private bank balances, securities below the ten percent threshold, cash, household effects, jewellery, works of art, vehicles and unsecured loan receivables do not count as domestic assets, even if they are located in Germany.
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| Example | Domestic asset? |
|---|---|
| Let block of flats in Leipzig | yes (no. 2) |
| 15 percent of a German GmbH | yes (no. 4) |
| 3 percent of a listed German AG | no |
| Instant-access savings account with a German bank | no |
| Private loan to a German debtor secured by a land charge | yes (no. 7) |
| Usufruct in a German condominium flat | yes (no. 9) |
| Painting in a Munich bank safe deposit box | no |
For GmbH shares, under Section 2 (1) no. 3 sentence 2 ErbStG it is sufficient that the deceased or donor reaches the ten percent threshold; if such a shareholding is given away in parts, later partial acquisitions are also treated as domestic assets under the conditions of Section 14 ErbStG, even if the remaining shareholding is then below ten percent. For shareholders who move their residence, the income tax consequences must also be taken into account; these are set out in our article on exit tax on GmbH shares.
Legacy of a German Property: Legal Position since March 2024
In its judgment of 23 November 2022 (II R 37/19), the Federal Fiscal Court (Bundesfinanzhof, BFH) had ruled that a claim under a legacy to the transfer of a domestic property is not a domestic asset within the meaning of Section 121 BewG. The legislator has responded: Section 2 (1) no. 3 sentence 1 ErbStG now expressly also covers the claim to the transfer of domestic assets, namely, under Section 37 (20) ErbStG, for acquisitions for which the tax arises after 27 March 2024. For current successions, the distinction between appointment as heir and legacy is therefore no longer decisive in this respect. How wills with a foreign connection are drafted is covered in our article on wills when living abroad.
The Allowances under Section 16 (1) ErbStG
The starting point for the reduction is always the allowance that would apply in the case of unlimited tax liability:
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| Acquirer | Tax class | Allowance |
|---|---|---|
| Spouse, registered civil partner | I | EUR 500,000 |
| Children, stepchildren, children of deceased children | I | EUR 400,000 |
| Grandchildren | I | EUR 200,000 |
| Other persons in tax class I (e.g. parents and grandparents on acquisition upon death) | I | EUR 100,000 |
| Persons in tax class II (e.g. siblings, nieces, nephews, parents in the case of gifts) | II | EUR 20,000 |
| Other persons | III | EUR 20,000 |
In addition, on acquisitions upon death, the special pension allowance (Versorgungsfreibetrag) under Section 17 ErbStG may apply: EUR 256,000 for the surviving spouse or civil partner, and for children between EUR 52,000 and EUR 10,300 depending on age. In each case, it is reduced by the capital value of pension benefits not subject to inheritance tax, such as a widow’s pension.
How the Allowance Is Reduced under Section 16 (2) ErbStG
The Wording in the Version since the StUmgBG
Since the Anti-Tax Avoidance Act (Steuerumgehungsbekämpfungsgesetz, StUmgBG) of 23 June 2017, the following applies: in cases of limited tax liability, the allowance under subsection (1) is reduced by a partial amount. This partial amount corresponds to the ratio between
- the sum of the values of the assets acquired at the same time that are not subject to limited tax liability and of the financial benefits not subject to limited tax liability that have accrued from the same person within ten years, and
- the value of the assets that have accrued in total from the same person within ten years.
Earlier acquisitions are included at their earlier value. Under Section 37 (14) ErbStG, the new version applies to acquisitions for which the tax arises after 24 June 2017.
In simplified terms, the formula is:
Reduction amount = allowance × (assets not taxable in Germany ÷ total acquisition within ten years)
Example: Inheritance with a German Flat, a German Securities Account and Foreign Assets
Example (fictitious): The widowed Bernd has lived in Portugal for many years and is not a German national. His daughter Clara lives in Canada and likewise has neither a residence nor a habitual abode in Germany. Clara is the sole heir to:
- a let condominium flat in Hamburg with a tax value of EUR 300,000 (domestic asset),
- a securities account with a German bank worth EUR 200,000 (not a domestic asset),
- a house in Portugal worth EUR 500,000 (not a domestic asset).
There were no previous gifts from Bernd to Clara.
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| Calculation step | Amount |
|---|---|
| Total acquisition | EUR 1,000,000 |
| of which not subject to limited tax liability | EUR 700,000 |
| Allowance under Section 16 (1) no. 2 | EUR 400,000 |
| Reduction amount: 400,000 × 700,000 ÷ 1,000,000 | EUR 280,000 |
| Remaining allowance | EUR 120,000 |
| Taxable acquisition: 300,000 − 120,000 | EUR 180,000 |
| Inheritance tax, tax class I, 11 percent (Section 19 (1) ErbStG) | EUR 19,800 |
Had she inherited only the flat, she would be entitled to the full allowance of EUR 400,000, and no German inheritance tax would be payable. For simplicity, debts and costs are not taken into account in the example; more on this below.
Spreading Gifts over Time
The ten-year period looks back from each acquisition. If a father living abroad first gives his daughter, who also lives abroad, only a German property, only that gift and acquisitions in the preceding ten years count for this gift. A gift of money made only afterwards does not retroactively affect the allowance for the property. However, if domestic assets are transferred again by gift or inheritance within the following ten years, the intervening gift of money is included in the calculation, and aggregation under Section 14 ErbStG covers the first acquisition of the property. Arrangements without an economic reason that are aimed solely at the reduction formula may also be measured against Section 42 of the German Fiscal Code (Abgabenordnung, AO).
Background: Flat-Rate Allowance, Application Option and the CJEU
Until 2017, Section 16 (2) ErbStG, former version, provided for a flat-rate allowance of only EUR 2,000 in cases of limited tax liability, irrespective of the degree of relationship. In its judgment of 17 October 2013 (C-181/12, Welte), the Court of Justice of the European Union ruled that this disadvantage infringes the free movement of capital; the case concerned a German property, and both parties lived in Switzerland.
As early as 2011, the legislator had introduced an application option in Section 2 (3) ErbStG, former version: under certain conditions, in particular residence in an EU or EEA state, the acquisition could, on application, be treated as subject to unlimited tax liability, with the full allowance but including further acquisitions from a period of ten years before and after the acquisition in each case. In its judgment of 8 June 2016 (C-479/14, Hünnebeck), the CJEU clarified that this option did not remedy the infringement either. The StUmgBG then abolished the option and introduced today’s proportional reduction.
In its judgment of 21 December 2021 (C-394/20), the CJEU declared this new reduction compatible with the free movement of capital because it is justified by the coherence of the tax system. In the same judgment, however, it objected to the fact that persons with limited tax liability could not deduct compulsory portion liabilities (Pflichtteilsverbindlichkeiten) as liabilities of the estate. Objections to the reduction based solely on the older case law therefore have little prospect of success.
Pension Allowance under Limited Tax Liability
The pension allowance under Section 17 ErbStG was previously not expressly provided for persons with limited tax liability. Today, Section 17 (3) ErbStG provides that it is also granted in cases of limited tax liability if the state in which the deceased was resident or the state in which the acquirer is resident is obliged under an international agreement to provide Germany with administrative assistance on request in relation to inheritance tax in accordance with the OECD standard for transparency and effective exchange of information. The Federal Ministry of Finance publishes a list of the third countries that meet this requirement in the Federal Tax Gazette (Bundessteuerblatt) Part I. Whether a specific state meets the requirement should be checked against the current list. Unlike the personal allowance, the pension allowance is not reduced proportionally according to the wording of Section 17 (3) ErbStG.
Debts, Compulsory Portions and Costs: Section 10 (6) ErbStG
In cases of limited tax liability, under Section 10 (6) sentence 2 ErbStG debts and encumbrances that are economically connected with the taxed domestic assets are deductible, typically a loan taken out to finance the German property. Debts that are not connected with individual items, such as compulsory portion claims, are deductible proportionally under Section 10 (6) sentences 3 and 4 ErbStG, in the ratio of the taxed net assets to the total net acquisition. This also applies to costs arising from the succession. How compulsory portion claims are enforced in international estates is explained in our article on compulsory portion rights over foreign assets. Anyone who has financed the German property through a loan taken out abroad should be able to prove the economic connection; otherwise, the debt may only be taken into account proportionally.
Double Taxation: Why the Credit under Section 21 ErbStG Usually Does Not Help Here
The state of residence often also taxes the same acquisition. However, the credit for foreign inheritance tax under Section 21 ErbStG only applies in cases of unlimited tax liability under Section 2 (1) no. 1 ErbStG, and even then only if the German tax arose within five years of the foreign tax. In cases of limited tax liability, avoiding double taxation is primarily a matter for the state of residence. Whether and how it takes the German tax into account should be assessed by a local adviser.
Germany has concluded double taxation treaties in the field of inheritance tax, and in some cases gift tax, with only a few states, namely Denmark, France, Greece, Sweden, Switzerland and the USA. For all other states, there is no treaty solution. Details are covered in our articles on inheritance tax and double taxation treaties and on the basics of double taxation treaties for emigrants.
Extended Limited Tax Liability under Section 4 AStG
For German nationals who move to a low-tax territory, extended limited tax liability under Section 4 AStG may apply after the five-year period has expired. The requirement is that Section 2 (1) sentence 1 AStG applied to the deceased or donor at the time the tax arose, i.e. that, in the last ten years before the end of his or her unlimited income tax liability, he or she, as a German national, had unlimited income tax liability for a total of at least five years, is resident in a low-tax territory or not resident in any foreign territory, and has substantial economic interests in Germany. The rule applies until the end of ten years after the end of the year in which unlimited tax liability ended.
In that case, in addition to domestic assets, all parts of the acquisition are taxed whose income, in the case of unlimited income tax liability, would not be foreign income within the meaning of Section 34d of the German Income Tax Act (Einkommensteuergesetz, EStG), such as balances with German banks and securities of German issuers. Under Section 4 (2) AStG, the rule does not apply if it is proven that a corresponding tax amounting to at least 30 percent of the German tax attributable to these additional parts is payable abroad.
For the allowance, a distinction must be made. Domestic assets under Section 121 BewG continue to be subject to limited tax liability under Section 2 (1) no. 3 ErbStG; to that extent, Section 16 (2) ErbStG, which expressly refers to this provision, applies directly. The additionally covered part, such as German bank balances, on the other hand, is not a case of Section 2 (1) no. 3 ErbStG: although Section 4 (1) AStG is linked to limited tax liability, it expressly extends taxation beyond the scope defined there. Whether and how the reduction under Section 16 (2) ErbStG also covers this additional part, for example whether it counts as taxable assets in the reduction formula or further reduces the allowance, is not expressly regulated by law. As far as can be seen, there has been no clarification by the highest courts. It is an open legal question that should be clarified by means of a binding ruling (verbindliche Auskunft) before any transfer.
Unclear legal position: obtain a binding ruling. Where the tax assessment in Germany is not certain or may foreseeably change, an application for a binding ruling from the tax office (Section 89 (2) AO) should precede implementation. The ruling binds the tax office to the assessment given for a precisely defined set of facts that has not yet been implemented, and a fee is charged for it. If the tax adviser does not recommend this in such a situation, in our view he or she is acting irresponsibly: the client risks having to litigate over the outcome years later, and that costs time and money.
Common Mistakes in Practice
- Resident status overlooked: A dwelling kept in Germany, the five-year period for German nationals or an acquirer living in Germany lead to unlimited tax liability, even if the deceased had lived abroad for decades.
- Foreign assets not disclosed: For the reduction formula, the tax office must know the total acquisition. In cross-border matters, there are increased duties to cooperate under Section 90 (2) AO; if information is missing, the tax office can make an estimate.
- Notification deadline missed: The acquisition must be notified to the tax office within three months under Section 30 ErbStG.
- Foreign tax ignored: How the state of residence taxes the acquisition should be clarified with a local adviser before any transfer.
For emigrants who want to organise their succession as a whole, our article on international succession law when emigrating provides the civil law foundation.
Conclusion
Since June 2017, the inheritance tax allowance under limited tax liability has no longer been a flat-rate amount but depends on the ratio between German domestic assets and the rest of the acquisition over the last ten years. Anyone who receives only domestic assets and has received no other assets from the same person in the last ten years keeps the full allowance; anyone who inherits mainly foreign assets receives only a fraction of it. The CJEU has approved this reduction. What matters, therefore, is a careful determination of tax liability, a complete record of all acquisitions and coordination with the tax law of the state of residence.
Frequently Asked Questions
As a child living abroad, am I entitled to the full allowance of EUR 400,000?
You receive the full allowance if you or the deceased are residents, or if you acquire only domestic assets and have not received any other assets not taxable in Germany from the same person within the last ten years. If you also receive assets that are not taxable in Germany, the allowance is reduced proportionally under Section 16 (2) ErbStG.
Does an account with a German bank count as a domestic asset?
As a rule, no. Private bank balances are not listed in Section 121 BewG. However, as assets that are not taxable, they reduce the allowance. The position may be different under extended limited tax liability under Section 4 AStG; how the allowance is then calculated has not been legally clarified.
Do I receive the pension allowance as a widow or widower?
Under limited tax liability, only if the deceased’s state of residence or your own state of residence provides Germany with administrative assistance in inheritance tax matters in accordance with the OECD standard (Section 17 (3) ErbStG). The list published by the Federal Ministry of Finance is one of the decisive factors.
Is inheritance tax paid abroad credited in Germany?
Section 21 ErbStG only applies in cases of unlimited tax liability. Under limited tax liability, relief is primarily available via a double taxation treaty or under the law of the state of residence. The latter should be examined by a local adviser.
Does it help to transfer assets in stages over time?
Staggering transfers over time can influence the calculation, but later acquisitions of domestic assets take into account intervening foreign gifts made in the last ten years. Every arrangement should be examined in advance in its overall context.
Attorney Dr. Johannes Fiala and the Munich-based firm, which focuses on international succession law, tax law and asset protection, advise clients on succession planning in connection with emigration, from determining tax liability and calculating the reduced allowance to inheritance tax planning. Dr. Fiala has published extensively on questions of emigration and asset protection. Please get in touch with the firm without obligation to discuss your individual situation in an initial consultation.
