Change in case law: relief in the case of foreign bequests of domestic real estate

Consequences of the BFH court decisionof 23.11.2022 - II R 37/19

In its court decision of 23 November 2022, Case No. II R 37/19, the Federal Fiscal Court (Bundesfinanzhof, BFH) ruled that a bequest as a claim under the law of obligations does not constitute domestic real property within the meaning of Section 121 No. 2 of the German Valuation Law (BewG), even if the bequest is for the transfer of a property located in Germany.

The court decision of the Munich Tax Court was based on the following case: By way of a bequest, an aunt transferred a property located in Germany to her niece upon death. Neither the aunt nor the niece had a domicile or habitual residence in Germany and there was also no case of a subsequent inheritance tax liability. The decisive legal question was thus whether a case of limited inheritance tax liability in Germany existed. This is to be determined on the basis of the conclusive catalog of domestic assets pursuant to Section 121 of the German Appraisal Act (BewG). In the present case, therefore, the question had to be clarified as to whether a bequest which is directed to the transfer of a property located in Germany is equivalent to a domestic property for these purposes, since Section 121 No. 2 BewG (only) mentions domestic properties, but not claims which are directed to the transfer of domestic properties.

The tax office in the case had answered this question in the affirmative and issued a corresponding inheritance tax assessment. The plaintiff in the case filed an objection against this assessment and, after a decision on the objection had been issued, brought an action before the Munich Tax Court. In its negative decision, the Munich Fiscal Court followed the view of the tax office. In its decision, the BFH overturned the court decision of the Munich Tax Court, the objection decision and the tax assessment notice and clarified that there was no German inheritance tax liability in the present case.

In its court decision, the BFH also emphasized that it no longer adhered to an earlier court decision of 10 May 2017, II R 53/14, as it had assessed the legal situation differently there. This change in case law is to be welcomed, as it follows civil law - as is also otherwise customary in inheritance tax law. And under civil law, a legacy is precisely a claim under the law of obligations on the part of the legatee against the heir (or heirs). Although this claim must then be fulfilled in rem, the subject of the inheritance tax acquisition, and thus of the inheritance tax, is exclusively the claim under the law of obligations. In its decision, the BFH rightly emphasizes that the limit of any possible interpretation is the wording of the provision and that acquisition claims are precisely not covered by Section 121 BewG.

The dispute took place in 2013, and the BFH therefore made a restriction in its court decision that is important for practice. It expressly left open how it would decide in a case after the entry into force of the EU Inheritance Law Regulation, i.e. after 17 August 2015, if a bequest has direct effect in rem under foreign law and German law must recognize this foreign legal situation.