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4.2 Inheritance Tax


Prior to 2003 the Court of Justice of the EU never had cause to examine whether the
inheritance tax rules of Member States were compatible with EU Treaty rules. However, since
then it has ruled in eight inheritance tax cases that Member States’ national courts referred for
preliminary rulings. At the same time the European Commission is receiving an increasing
number of complaints about cross-border inheritance tax issues. It seems, therefore, that this
area is becoming one of growing concern to EU citizens. It is possible that EU Member
States’ inheritance tax rules as applied in cross-border situations are hindering EU citizens
from benefiting fully from their right to move and operate freely across borders within the
Internal Market. These rules may also be creating difficulties for the transfer of small
businesses on the death of owners.

Individuals and business can face two types of inheritance tax problems in cross-border situations. First, they may be exposed to discriminatory application of Member States’ inheritance tax rules in cross-border situations. Second, there is the risk of unrelieved double or even
multiple taxation of a single inheritance by several Member States, which, in the absence
of appropriate tax relief mechanisms, could lead to an excessively high rate of overall
As for the first problem, the Court of Justice of the EU ruled in six out of eight cases
examined since 2003 (Case C-364/01 Barbier was the first case, followed by case C-513/03 van Hilten-van der Heijden, case C-
464/05 Geurts, case C-256/06 Jager, case C-11/07 Eckelkamp, case C-43/07 Arens-Sikken, case C-67/08 Block,
and case C-510/08 Mattner) that the inheritance tax laws of the Member States in qustion were
incompatible with the EU treaty rules on free movement of capital because the laws provided
for less favourable rules where either the assets or the beneficiaries were located outside the
Member State under examination. In the light of this case-law, Member States’ inheritance tax
provisions may be considered in breach of the free movement of capital when:

• they provide for different rules for the valuation of assets that are part of the
inheritance, depending on where these assets are located;
• they restrict the deductibility of debts/liabilities related to assets that are part of the
inheritance of non-residents;
• they provide for lower tax allowances with respect to non-residents.

The above list of incompatible features is not exhaustive and is simply intended to give
examples on the basis of relevant cases already examined by the Court of Justice. Other
inheritance tax rules distinguishing between purely domestic situations and situations with
cross-border elements may be challenged by the Court of Justice if they restrict the free
movement of capital.

As for the second problem, the significant differences in the civil and tax legislation of the
Member States in the field of inheritances can potentially result in double, or even multiple,
taxation by several Member States in the case of cross-border inheritances. Even though the
EU Court of Justice concluded that the Treaty does not oblige Member States to eliminate the
double taxation of inheritances that may arise due to the parallel exercise of tax competence
by two Member States2, it is clear that international double taxation is an obstacle to crossborder
activity and investment within the EU.

Most EU Member States levy taxes upon the death of a person. Some Member States apply a
tax on the heirs, while other Member States apply a tax on basis of the estate. In both cases
tax liability is determined on the basis of a nexus that can be personal or territorial. In
addition, the existence of the nexus is determined on the basis of a variety of connecting
factors (i.e. the residence, domicile or nationality of the deceased and/or of the beneficiary;
and/or the location of property) which can apply concurrently and which may differ in
definition and meaning in the various jurisdictions. This situation may potentially lead to
double or even multiple taxation of the same inheritance in different Member States. Double
taxation problems could also arise due to the fact that Member States apply different valuation
methods for the same assets and debts and may be exacerbated by the fact that some Member
States apply high inheritance tax rates for certain group of beneficiaries (the rate may even
reach 80% over a certain threshold in cases where the deceased and the beneficiary are not

Many Member States have adopted a mechanism to avoid double taxation of inheritances
under domestic law. However, it is our understanding that such a relief would not, in most
cases, provide complete relief from double taxation. In addition, Member States have
concluded very few bilateral tax treaties for the avoidance of double taxation on estate and
inheritance tax (there are, in fact, only 33 bilateral inheritance tax treaties between Member
States out of a possible total of 351). Consequently, there is currently no comprehensive
solution to any problems of double taxation of inheritances that may arise.
Furthermore, even high inheritance taxes in one country alone can significantly hinder the
transfer of business of small and medium-sized enterprises (SMEs). Unrelieved double
taxation in case of cross-border transfers could be an even greater threat and could, if it arises,
lead to small businesses’ withdrawal from the Internal Market.

Experience has shown that it is not always easy for Member States to ensure that their tax
legislation is compatible with the non-discrimination principle. States sometimes adapt their
laws to taken account of Court’s decisions in an asymmetrical or incomplete way, or in a way
that worsens the positions of taxpayers. With the increasing cross-border movement of EU
citizens, the number of complaints about aspects of Member States’ inheritance tax laws may
also increase which may in turn lead to an increased number of referrals to the Court of
Justice of inheritance tax related questions. Bilateral tax treaties for the avoidance of double taxation on estate and
inheritance could address a larger number of issues that are not covered by a simple
mechanism of unilateral tax relief. A greater treaty coverage might therefore be able to resolve
the problem of double taxation of inheritances in a more effective and satisfactory way
than a mechanism of unilateral relief. However, the OECD Model Convention on Inheritance
and Estate Tax has not been updated for some time (the latest version dates back to 1982) and
might need to be adapted if it were to be used as a basis for such bilateral conventions.
The inclusion of inheritance tax rules in bilateral income tax treaties has been
adopted as a solution by a few Member States.

National rules vary

The national rules on inheritance tax vary substantially among the Member States of the
European Union. A majority of the 27 Member States (18) have an inheritance or an estate
tax, which is respectively levied on the heirs or the estate of a deceased person. Out of these
18 Member States 15 have an inheritance tax and 4 have an estate tax. Denmark is the only
Member States with both inheritance tax and estate tax. Nine Member States impose neither
an inheritance tax nor an estate tax.
Inheritance taxation may create two potential internal market problems. First, cross-border
discrimination may arise if non-domestic assets and/or liabilities are subjected to higher levels
of inheritance taxes than equivalent domestic categories. Second, assets and liabilities may
end up being taxed for inheritance purposes in more than one EU tax jurisdiction potentially
leading to very high levels of taxation. Both problems arise from the fact that EU citizens
own assets outside their home Member State and may have relatives as well in other EU
Member States.

Domestic tax rules may contain
provisions that conflict with the non-discrimination principle. Based upon a number of
cases, the European Court of Justice has in recent years established an increasingly clear jurisprudence
in the area. National tax rules that have been judged to be in breach of EU law
are those that:
• Provide different and less favourable rules for the valuation of assets forming
part of an inheritance if those assets are located in another Member State
• Restrict the deductibility of debts/liabilities related to assets that are part of the
inheritance of testators who were non-resident at the time of death
• Apply higher inheritance or estate duties for legacies made to charities established
in other Member States
• Grant tax exemptions from inheritance or estate tax only if the recipient is a
domestic charity
• Provide for higher personal allowances in favour of resident taxpayers.

A large number of the Member
States still have discriminatory rules. The main discriminatory problems are linked to four areas:
• The scope of specific exemptions from the inheritance tax rules
• The deduction of debt in calculation of the tax base
• The design of valuation methods for foreign located assets
• Special exemption for certain domestically located assets

Double taxation
The main cause of such double taxation is a conflict between the connecting factors of the
tax rules of two or more Member States. Connecting factors are rules that determine if a particular
inheritance or estate is connected to the tax jurisdiction of a given Member State.
Most Member States have two connecting factors included in their domestic inheritance tax
rules, namely:
• A personal nexus rule
• A source rule
A personal nexus rule is the main connecting factor in all Member States with inheritance
tax rules. Member States using these connecting factors taxes on the basis of one or more
nexus between the deceased/heir and the territory of the State. Three main principles are applied
by the Member States, the residence principle, which is the most common, the domicile
principle and the nationality principle. Some Member States apply a combination of the
three principles.

Small number of bilateral tax treaties

While the OECD has developed a bilateral tax treaty
model to deal with inheritance and estate taxes, in June 2010, only 33 bilateral treaties are in force and
351 would be required to secure a complete coverage for all Member States.

The scope of the unilateral relief is limited: In some Member States the unilateral relief for
foreign paid taxes is limited to a subset of asset, typically real estate and/or other immovable
assets, and all limit the scope of the relief to cover only inheritance and estate taxes and not
other taxes levied on the deceased’s assets. Furthermore, several Member States only grant a
unilateral relief for taxes levied at a national level and not locally levied taxes, as in Belgium.

Unilateral relief does not cover all cases of double taxation: Most Member States grants a
unilateral relief for inheritance and estate taxes paid in another Member State, but it fails to
cover a number of important cases.

The Block case(ECJ judgment in the Margarete Block case (C-67/08)), which the European Court of Justice has recently dealt with, provides an example
of the negative impact that double taxation may have on the financial situation of an individual.
In this particular case, a German resident, Ms Block, was taxed in both Spain and
Germany on a Spanish located inheritance. She consequently ended up with an extra tax bill
of more than €63,500, which is equivalent to an increase in the taxes paid of more than