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Inheritance tax and gift tax

The German Inheritance Tax Act provides for various forms of preferential tax treatment with regard to assets located in Germany, the rest of the EU or the EEA:

  • tax exemptions for corporate assets
  • tax exemption for the family home
  • tax exemption for residential properties that are let out (10% deduction)
  • tax exemption for cultural objects

Various issues related to the EU or EEA also play a role with regard to the holding period following a preferential transfer of corporate assets:

  • salaries (only salaries in the EU/EEA are taken into account)
  • tax-neutral restructuring (no longer possible in some cases following the UK’s exit from the EU/EEA).

If the UK leaves both the EU and the EEA, preferential tax treatment can no longer be granted when these assets are transferred. Early consideration should be given to structures designed to address these worst-case scenarios, e.g.:

  • transfer of the assets prior to the UK’s exit from the EU/EEA
  • structures featuring a holding company

Exit tax (income tax)

The exit of a domestic shareholder with a minimum 1% stake in a corporation results in disclosure and taxation of the hidden reserves associated with the shareholding.

  • Exit to take up residence in an EU/EEA country: the tax can be deferred without interest and without providing collateral.
  • Exit to take up residence in a non-EU/EEA country: the tax can be deferred for a maximum of 5 years if collateral is provided.

If the UK leaves both the EU and the EEA, deferral of the exit tax without interest and with no time restriction will no longer be possible.

Any deferral granted previously must be revoked if residence in the EU/EEA country comes to an end through “abandonment of domicile”.

It is currently unclear whether a deferral already granted must be revoked as a result of the UK’s exit from the EU/EEA. 

Tax deduction for donations (income tax)

Donations to not-for-profit organisations in the EU/EEA are tax-deductible as special expenses under certain circumstances.

The German Income Tax Act does not provide for deductible donations to not-for-profit organisations in a third country. As such, donations to the UK may no longer be deductible in future.

Foreign family foundations (taxation under CFC rules)

In a given case, the tax on the income from a foreign family foundation is imputed directly to the founder. Family foundations domiciled in the rest of the EU/EEA can avoid this taxation under CFC rules by demonstrating that the founder has no access to the foundation’s assets in fact or in law.

If the UK leaves the EU and the EEA, this option would no longer be available for a family foundation domiciled in the UK.