US BILATERAL TAX TREATY WITH GERMANY

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Key Points

• Property which is taxable in the State in which it is situated comprises (i) real property; (ii) assets of an enterprise forming part of a permanent establishment;  (iii) interest in a partnership which owns immovable or business property in the US.

• Property not otherwise mentioned in the Treaty is taxable in decedent’s State of domicile.

• A Germany domiciliary, who is neither a citizen nor resident of the US, is entitled to a unified credit against his US tax liability which is the greater of $13,0000 or the amount yielded by the formula US unified credit x value of estate situate in the US / value of gross worldwide taxable estate.

• A tax-exempt transfer to a charitable organization in a Contracting State is exempt in the other State provided the transfer would be eligible for such exemption if the organization had been created or organized in the other Contracting State.

• Property subject to US estate tax passing to a non-US citizen spouse is includable in the US tax base only to extent that its value exceeds 50% of all US property in the estate.  Such property may also qualify for a marital deduction in the amount of the lesser of the value of the qualifying property or the US exclusion amount ($12,060,000).

• If decedent was a citizen of the US but domiciled in Germany at the time of his death, the US allows a credit against its tax in an amount equal to the tax paid in Germany with respect to property other than property which the US may tax in pursuant to Articles 5, 6 or 7.

• Where Germany imposes tax by reason of the domicile therein of the decedent, heir, or other beneficiary, double taxation is avoided in the following manner: (a) where the US imposes tax with respect to property in accordance with Article 5, 6, or 8, Germany credits against the tax it levied against such property an amount equal to the tax paid to the US with respect to such property.

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Example 1

Wolfgang, a German citizen, was domiciled in Germany at the time of his death in 2022. His estate comprised the following assets

• Mine in Vermont valued at $35,000,000 

• A partnership in a German retail business which owned a single sales outlet in California valued at $5,000,000

• A castle in Bavaria valued at $10,000,000 which he and his wife, Marlene, used as a holiday home.

​​

He bequeathed the sales outlet and castle to his wife Marlene, who is a German citizen and domiciliary, and the mine to his son, Dan, also a German citizen and domiciliary, with a gift over to Marlene in the event that Dan would not survive him. Some years before Wolfgang’s death, Dan, went missing at sea in a boating accident and was officially declared dead. Wolfgang had no other lineal relatives at the time of his death.

​

Both Marlene and Dan had renounced their entitlements under Germany’s forced heirship rules at the time Wolfgang drew his will.

​

Tax Rates, Exemptions and Exchange Rates for Year 2022

US Exclusion Amount                                                       $12,060,000 

US Unified Credit                                                                $4,769,800

US Estate Tax on First $1,000,000                             $345,800

US Estate Tax on Balance                                              40%

Vermont Exclusion Amount                                           $5,000,000

Vermont Estate Tax Rate                                                16%

Vermont Marital Deduction                                            Unlimited amount may be Deducted                                                                                                              from Gross Estate                                              Estates are now able to take a deduction for state estate taxes paid.

German Inheritance Tax-Free Exemption              €500,000

German Tax-Free Spousal Benefits Allowance   €256,000

German Age Allowance for 26 year old                     €10,300

German Marital Deduction                                              Nil      

  

Germany IT Rates

​Tier 1 - Appling to spouses and children

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Up to €75,000                                         7%                 

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€75,000–€300,000                              11%               

​

€300,000–€600,000                          15%                

​

€600,000–€6,000,000                      19%                 

 

€6,000,000–€13,000,000                23%                

 

€13,000,000–€26,000,000             27%                 

​

More than €26,000,000                    30%

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US basis of taxation                            Citizens and domiciliaries - worldwide assets

                                                                       Non-resident non-citizen - situs assets

German  basis of taxation                 Residents if deceased was resident at                                                                                                         time of death, or beneficiary was resident at                                                                                             the time of acquisition

                                                                       Non-tax residents – domestic property

Assume US$1 = €1

​

Assume Marlene is entitled to the tax-free benefits allowance.

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Assets in Estate

US estate: $40,000,000

German estate: $10,000,000

Entire estate: $50,000000

 

Calculation of US Federal Tax Liability

                                                                                                                                                           $US

US properties (Marital Exclusion 20,000,000)                                                       20,000,000*

Marital Deduction                                                                                                                  12,060,000**

Gross Taxable Estate                                                                                                             7,940,000

Tax on first $1,000,000                   345,800

Tax on balance @ 40%                 2,776,000

Tentative Tax Liability                                                                  3,121,800                                                                                                                                                

Less: Prorated Unified Credit

$4,769,800 x 20,000,000     =   3,179,867                                                                         

                 30,000,000

                                                                                                                 3,121,800***

                                                                                                                                  0

Tax Liability: $0.00

 

*  Extent by which value of estate ($40,000,000) exceeds $20,000,000 (50% of entire US estate of $40,000,000) = $20,000,000

** Lesser of qualifying amount of $20,000,000 or exclusion amount of $12,060,000

***Lesser of $3,179,867 `(prorated unified credit) or $3,121,800 (US tax liability)

              

Calculation of Marlene’s Vermont Tax Liability                   

                                                                                                                          $   

Mine                                                                                                     35,000,000

Spousal Exemption                                                                      35,000,000

Tax Liability                                                                                                           0

     

                              

Calculation of Marlena’s German Tax Liability

                                                                                                                          €

Castle in Bavaria                                                                              10,000,000

Mine in Vermont                                                                               35,000,000

Sales outlet in California                                                                5,000,000                                      

Gross Taxable Estate                                                                     50,000,000

Inheritance Tax-Free Exemption          500,000

Tax-Free Benefits Allowance                  256,000

                                                                                                                        756,000

                                                                                                                 49,244,000

Tax at 30% on  49,244,000                     14,773,200

Less: Credit for US Tax Liability                              0

Net Tax Liability                                                                                 14,773,200

Net Value of Taxable Estate                                                     34,470,800

Tax Liability; €14,773,200   ​                

                                                                                                

​​Example 2 - Revision of Calculation 

​​

Wolfgang’s son, Dan (who had been declared legally dead), unexpectedly surfaced a week after issue of the Certificate of Inheritance.  Dan's reappearance means that a new Certificate of Inheritance must be applied for to replace the Certificate of Inheritance already issued. Upon issue of the new Certificate of Inheritance, the estate must be redistributed in accordance with the terms of Wolfgang's will, under which Dan had been left the mine in Vermont. 

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Calculation of US Federal Tax Liability:

                                                                                                                                                             $

Sales Outlet (excluded)*                                                                                                           -

Mine                                                                                                                                           35,000,000

​Gross Estate                                                                                                                          35,000,000

Less: Vermont Estate Tax**                                                                                             4,800,000

Gross Taxable Estate                                                                                                         30,200,000

Tax on first $1,000,000                       345,800

Tax on balance @ 40%                   11,680,000

Tentative Tax Liability                                                              12,025,800   

Less: Prorated Unified Credit

$4,769,800 x 35,000,000     =                                                         

               45,000,000                                                                      3,709,844

                                                                                                                                                         8,315,956 

                                                                                                                                                      21,884,044                                                                              

Tax Liability: $8,315,956   

​​

*Marital Exclusion.

Value of US estate: $35,000,000 (mine) + $5,000,000 (sales outlet)  = $40,000,000

50% of  $40,000,000 = $20,000,000

Value of sales outlet, $5,000,000, does not exceed $20,000,000 and is therefore excluded from the US taxable basis

** 26 U.S. Code § 2058. State succession tax is deductible from value of gross estate.                                                                                                                                          

Calculation of German Tax Liability -Marlena

                                                                                                                   €

Castle in Bavaria                                                                       10,000,000

Sales outlet in California                                                         5,000,000                                      

                                                                                                            15,000,000

Less:  Exemption                                    500,000

              Benefits Allowance                  256,000

                                                                                                                  756,000

 Gross Taxable Estate                                                              14,244,000

Tax @ 27%                                                                                        3,845,880

Value of Net Taxable Estate                                                   10,398,120

                                                                         

Tax Liability; €3,845,880​​            

                                                                                         

Calculation of Vermont Tax Liability – Dan

                                                                                                                         $

Mine in Vermont                                                                            35,000,000

Exclusion Amount                                                                          5,000,000

Gross Taxable Estate                                                                 30,000,000

$30,000,000 @ 16%                                                                       4,800,000

​Net Value of Taxable Estate                                                   25,200,000

Tax Liability: $4,800,000

                                                                                  

Calculation of German Tax Liability - Dan

                                                                                                                         €

Mine in Vermont                                                                            35,000,000

Less: Tax Free Exemption         400,000                                                              

Age allowance                                      10,300

                                                                                                                      410,300

Gross Taxable Estate                                                                  34,589,700

Tax @ 30%                                      10,376,910

​Less: US Federal Tax                  8,315,956 

​

Net Tax Liability                                                                               2,060,954   

Net Value of Estate                                                                     32,528,746

German Tax Liability: €2,060,954     ​

​

Summary:

US Federal Tax Liability: $8,315,956

Marlena's Germany Tax Liability: €3,845,880   

Dan's Vermont Tax Liability: $4,800,000

Dan's Germany Tax Liability: €2,060,954     

Dan's Total Tax Liability: $15,176,910 (€15,176,910)                      

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