international estate planning handbook - PSP München

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INTERNATIONAL
ESTATE PLANNING
HANDBOOK
www.dfk.com
DFK International I INTERNATIONAL ESTATE PLANNING HANDBOOK
INTERNATIONAL
ESTATE PLANNING HANDBOOK
Estate planning – in an era when the world is increasingly global
Estate planning is the process of anticipating and arranging an individual’s assets so that they can be
distributed according to their wishes and tax efficiently either during their lifetime and/or following their death.
It is an ongoing process and should be started as soon as the individual has any measurable wealth. As life
progresses and goals shift, the estate plan should move to be in line with new goals. The lack of adequate
estate planning can cause unwanted results as well as undue financial burdens.
Estate planning may include tasks like the establishment of gift plans, creating a last will and the designation
of heirs or trust beneficiaries. In addition a living will can be created that specifies the duty of care for an
individual’s assets and/or their medical care.
Globalisation, especially in the basic aspects of the location and movement of capital and investments as
well as the migration and movement of people, is the reality in which we live. It is not just the assets of an
individual that may be spread widely throughout the world, family members and other beneficiaries may be
located in different countries owing to business engagements, studies, overseas internships or other factors.
This wide variety of personal and financial international links can result in the crystallisation of an abundance
of latent conflicts. In general, succession is subject to the law of the country in which the deceased person
was resident or had citizenship at the time he/she died. However, in practice, this principle is frequently
overruled if, for example, real estate that is located overseas is passed to a beneficiary. In this case, where
assets are held in overseas territories, foreign law might have more severe regulations regarding the statutory
share than domestic law. If all of these circumstances are not considered carefully, plans might fail.
Basically, inheritance or gift tax (estate tax) may be raised according to the principle of territoriality or the principle
of universality. According to the principle of territoriality, all objects and rights that are situated in the territory of
the country raising the tax are subject to taxation there. Based on the principle of universality, all taxpayers who
are a citizen of the country raising the taxes are charged with taxes for their assets worldwide, irrespective of
the location of the assets. Most states raising inheritance and gift tax use a mixture of both principles.
Thus, each individual case may be subject to a complex set of conditions and potential double taxation risks
need to be avoided. Therefore, it is recommended that individuals seek advice from experts of the respective
countries in advance so as to avoid unpleasant surprises and achieve their desired objectives.
In this booklet, skilled experts of DFK International and cooperating advisers give you an overview of the
tax and legal regulations concerning international asset portfolios in some important selected countries.
Owing to the wide variety of residence conditions and circumstances, the booklet makes no claim to
completeness. However, it should enable a first assessment and provide an initial overview.
January 2016
Roland W. Graf
[email protected]
DFK International Tax Committee
1
INTERNATIONAL ESTATE PLANNING HANDBOOK
PARTICIPATING CONTRIBUTORS
Country
Contributor
Name
Telephone
Email
Australia
DFK Benjamin King Money
Tim Kelleher
+61 3 9804 0411
[email protected]
Nugents Accountants &
Business Advisors
Dario Gamba
+61 3 9683 5000
[email protected]
Austria
IB Interbilanz
Christoph Schmidl
+43 1 50543130
[email protected]
Belgium
Juribel BvBA
Johan Dens
+32 3 2322328
[email protected]
Canada
Kenway Mack Slusarchuk
Stewart LLP
Cal Stewart
Sharon Gross
+1 403 536 5120
+1 403 536 5171
[email protected]
[email protected]
Cyprus
Demetriou, Trapezaris Ltd.
Iacovos Raoukkas
+357 22879300
[email protected]
France
SNA Experts
Arnaud Rudowski
+33 1 55300990
[email protected]
Germany
Peters, Schönberger & Partner
Esche Schümann Commichau
Roland W. Graf
Wolfgang Sälzer
+49 89 381720
+49 40 368050
[email protected]
[email protected]
India
Sathguru Management
Consultants
Ragunathan
Kannan (Ragu)
+91 40 3016 0204
[email protected]
Italy
Studio Piccinelli Del Pico Pardi
& Partners
Giusy Pisanti
+39 06 6819091
[email protected]
Malta
DFK Malta
David Farrugia
Joseph Farrugia
+356 21 444962
+356 21 444962
[email protected]
[email protected]
Mexico
Calvo Nicolau y Marquez
Cristerna, S.C.
Oscar Marquez
+52 55 5246 3470
[email protected]
Netherlands
Alfa Accountants en Adviseurs
Bart Schuver
+31 88 2533900
[email protected]
Russia
Althaus Group
Sergey Gerasimov
Alexander
Akhmetbekov
+7 499 6782298
+7 499 6782298
[email protected]
[email protected]
Spain
Iberian DFK Professional
Services, S.R.L
Pedro Avila Lainez
+34 91 5422046
[email protected]
Switzerland
Fidinter AG
Rickenbach & Partner
Michel Jaggi
Sinan C. Odok
+41 44 2972050
+41 44 3914477
[email protected]
[email protected]
United Kingdom Langdowns DFK Limited
Graeme Lovell
Janette Whiteway
+44 23 8061 3000
+44 23 8061 3000
[email protected]
[email protected]
United States
Chris Benner
Ryan Dudley
+1 770 396 2200
+1 212 842 7095
[email protected]
[email protected]
2
Bennett Thrasher P.C.
Friedman LLP
TABLE OF CONTENTS
COUNTRY-SPECIFIC ISSUES
THE NEW EU REGULATION ON SUCCESSION4
AUSTRALIA5
AUSTRIA21
BELGIUM31
CANADA40
CYPRUS51
FRANCE56
GERMANY68
INDIA79
ITALY90
MALTA102
MEXICO113
NETHERLANDS120
RUSSIA130
SPAIN137
SWITZERLAND148
UNITED KINGDOM
157
UNITED STATES
168
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THE NEW EU REGULATION ON SUCCESSION
The EU regulation on succession entered into force on August 16, 2012 and has been effective since
August 17, 2015 now being a material regulation directly applying to EU citizens. The regulation creates a
uniform international inheritance law for the participating EU member states (all EU member states except
for the UK, Ireland and Denmark). Now, the system of conflict-of-law of the member states is regulated by
uniform principles. The material inheritance law of the respective national legal system is not affected by
the EU regulation on succession.
The EU regulation on succession explicitly does not apply for gifts made at lifetime, also in the form of
contracts in favor of third parties on death, rights of accretion and company law.
1.Place of last abode and the possibility of choice of law as decisive factors for the
determination of applicable law
The essential characteristic of the regulation pursuant to art. 21 of the EU regulation on succession
is an uniform connecting factor for all member states, namely the last habitual abode of the testator. No. 23
of the explanatory statement for the regulation describes the last habitual abode as being the place which
“indicates a close and strong tie to the relevant country”. According to previous case law, the habitual abode
was defined as the focus of all social, cultural and economic relations of a person having a lasting nature.
If the testator has not made a choice of law to the contrary, the inheritance law that will apply is based
on the last habitual abode of the testator. Hence, the global estate of the testator is disposed of according
to the national provisions of that respective inheritance law.
Art. 22 of the EU regulation on succession contains a pioneering development regarding the choice of law
to the legal system of the testator’s nationality. Every testator is able to choose the law of succession of his/
her country of origin, i.e. the law of the country of his/her nationality. However, the testator may only select
between the law of the country of his/her nationality and the law of the country where he/she has his/her
place of habitual abode. Thus, the testator must not freely select the law of inheritance of any EU member
state. Furthermore, the law of the place of the habitual abode cannot be chosen by a special order of
the testator.
2. Introduction of an European certificate of succession
Regardless of whether the testator has selected the law of the country of his/her nationality as the law of
succession or if the testator has not made a choice of law and, thus, the law of the country of the habitual
abode of the testator is applicable the country which is competent to rule over the respective estate is
now entitled to issue a European certificate of succession according to art. 62-73 of the EU regulation
on succession. Consequently, the place of jurisdiction with regard to the entire estate depends on which
country’s inheritance law is applicable in the given case. In the case the estate is located in different EU
member states a European certificate of succession can be applied for. The party named in the European
certificate of succession as heir is the party who is legitimated as heir by such certificate. Whosoever renders
a service to such person named in the European certificate of succession will be released from its liability.
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Australia
A.
Tax law
1.
Inheritance and gift tax
There is currently no equivalent of an inheritance tax or a gift tax in Australia. This rule applies both at the
State and Federal level.
2.
Wealth tax
There is currently no equivalent of a wealth tax in Australia. This rule applies both at the State and Federal
level.
3.
Double taxation agreements (“DTAs”)
Australia currently has entered into a total of 71 international tax treaties/protocols. Given that they do not
exist in Australia, none of the taxes covered in these agreements comprise an inheritance tax, gift tax or a
wealth tax.
Australia also has a large number of tax information exchange agreements (“TIEAs”). These taxes do get
broad coverage in these agreements to facilitate exchange of information to assist with taxing Australian
inheritances and gifts in relevant foreign jurisdictions.
4.
National specifics/income taxes
4.1
General overview (what happens on death)
When a taxpayer dies a “deceased estate” is formed which is a special type of trust.
The deceased estate will have a trustee (“executor”) and estate beneficiaries and will have trust property
(assets of the deceased), all of which will be governed by a trust deed (a will). Where a will does not exist, the
intestacy rules will apply where there is legislation which sets out the statutory order of taking.
4.2
Taxation of a deceased estate
General overview
Who gets taxed on the net income of a deceased estate is usually determined by which stage we are at in
terms of the administration of the estate. A summary of these stages is as follows:
1.
whilst the estate is being administered: taxed to the trustee at the tax-rate of the deceased for a
maximum three (3) year period; and
2. when the estate is fully administered: taxed to estate beneficiaries that are presently entitled.
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Beneficiaries will be presently entitled to a share of the net income of the trust estate when they have an
indefeasible and vested interest in the income which will generally be when the estate of the deceased
has been fully administered. An estate is generally fully administered when the residue of the estate can be
determined after the payment or provision of testamentary expenses, death duties, debts and legacies.
If a beneficiary is not under a legal disability (minor, bankrupt, or mental incapacity), then the net income is
assessed at the marginal tax rate of the beneficiary.
If a beneficiary is under a legal disability (minor, bankrupt, or mental incapacity) and is a resident, then the net
income is assessed to the trustee of the deceased estate and taxed as if it were the income of an individual.
The trustee is also generally taxed under the same situation if the present entitlement is to a non-resident
individual beneficiary, although only to the extent of the net income that is attributable to an Australian
source.
Capital gains tax (“CGT”)
The assessable income of a taxpayer includes any net capital gains derived by a taxpayer during an income
year. A capital gain occurs when a CGT event happens to a CGT asset. The term “CGT asset” is broadly
defined and includes any type of property, whether tangible or intangible.
Capital gains tax and deceased persons (resident beneficiary)
When a taxpayer dies, a capital gain or loss from a CGT event relating to a CGT asset of the deceased
taxpayer is ignored. The CGT asset is generally deemed to be acquired by the ultimate beneficiary at the
date of death of the taxpayer, at either the cost base or market value of the CGT asset depending on if the
CGT asset was acquired before or after September 20, 1985.
Capital gains tax and deceased persons (non-resident beneficiary)
An assessable capital gain or loss can still arise from CGT event K3. CGT event K3 happens if you die and a
CGT asset you owned just before dying passes on to an ultimate beneficiary who is (when the asset passes)
either:
• a non-resident; or
• a tax-advantaged entity (such as a charity, church of Australian superannuation fund).
In this event, the deceased taxpayer is liable for any capital gain or loss in the final income tax return as if he/
she disposed of the asset immediately before his/her death. The capital gain is calculated using the market
value of the asset at the date of death and the deceased cost base of the CGT asset.
You should therefore carefully consider the assets to be distributed to a non-resident beneficiary, and
perhaps have assets with minimal CGT implications (e.g. cash) being distributed to any potential non-resident
beneficiary.
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Capital gains tax and main residence exemption
Special rules apply to the main residence of a deceased. A full exemption from CGT applies for the main
residence of a deceased as at the date of death where:
• the trustee or beneficiary disposed of the residence within two (2) years of the deceased’s death; or
• the residence is occupied as the main residence by a surviving spouse, a beneficiary or a person with a
right to occupy under the deceased’s will, from the date of death until it is disposed.
Stamp duty
There is generally a full exemption from stamp duty (or only a nominal amount of duty payable) in all
Australian states and territories in relation to the vesting of dutiable property in the executor or legal personal
representative (“LPR”) of a deceased person. This exemption also applies in relation to the transfer of assets
of the deceased’s estate to a beneficiary either under a will or relevant state or territory intestacy laws.
4.3
Expatriate – resident estates with non-resident beneficiaries
Non-resident beneficiaries of resident deceased estates are subject to capital gains tax in Australia. In
particular CGT may apply to the transfer of assets in a deceased’s estate to a non-resident beneficiary. The
gain arises in the deceased’s final tax return and is paid by the deceased’s estate.
For example, in a situation where the deceased estate includes shares in a publicly listed company and
Australian real estate and a non-resident is the sole beneficiary of the estate, then:
•
CGT is imposed on the estate upon transfer of the shares to the non-resident. This is despite the fact that
the shares are not “taxable Australian property” (“TAP”) in the hands of the non-resident beneficiary and
will not be subject to Australian taxation on a subsequent disposal by the non-resident beneficiary; and
•
there will be no CGT liability imposed on the estate at the time of transfer of the Australian real estate to
the non-resident beneficiary. For the estate, the normal (resident beneficiary) CGT rollover on death will
apply on the transfer of assets that are TAP. The non-resident however, will be subject to Australian tax on
the subsequent disposal of the Australian real estate on the basis that the asset is TAP.
TAP is primarily comprised of Australian real estate and other specified assets. Where a beneficiary is a nonresident, tax is paid by the estate unless the will provides otherwise. This has implications when drafting a
will.
4.4 Expatriate – non-resident deceased estates and testamentary trusts
(“estate trusts”)
An estate trust will be non-resident for a particular income tax year if:
• none of its trustees are Australian tax residents at any time during the income year; and
• it is not centrally managed and controlled in Australia at any time during the income tax year.
Normal Australian tax residency rules apply for this purpose, subject to any relevant double tax treaty
(“DTA”) override.
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Deceased’s residency and asset location not relevant
The residency status of the deceased before death – and the location of assets of the estate trust are
not relevant to the residency of the estate trust. It is, therefore, theoretically possible for an estate trust
established by an Australian tax resident for assets wholly located in Australia to be a non-resident estate
trust. This could be the case where a non-resident executor is appointed and the estate is wholly managed
and controlled outside of Australia throughout the administration of the estate.
Who is taxed?
It will generally be the trustee or a beneficiary of a non-resident estate trust who will be taxed. Deciding who
will be taxed depends on a number of factors including:
• the source of the amount;
• whether the amount is income or a capital gain;
• whether the amount has been distributed to a beneficiary; and
• the rights of beneficiaries under the will or testamentary trust.
The two timeframes comprise:
•
the accumulation phase – where the trustee does not distribute or provide benefits to any beneficiaries;
and
• the distribution phase – when the trustee provides benefits or makes distributions to beneficiaries.
Accumulation phase – taxation of the trustee
In the accumulation phase, it is useful to consider the taxation of the trustee first and then the taxation of any
beneficiaries.
What is taxed to the trustee?
During the accumulation phase, the trustee will be required to include the types of income that any nonresident would be required to include in his/her assessable income. These amounts would be:
• Australia-sourced income; and
• capital gains from taxable Australian property.
What rate of tax applies?
Any Australia-sourced income or capital gains from TAP would be included in the non-resident trustee’s
Australian assessable income under either section 99 or 99A of the Income Tax Assessment Act 1936
(“ITAA36”). The default position is that such amounts would be taxed under section 99A ITAA36. Under
section 99A ITAA36, all of the assessable income of the non-resident trust would be subject to tax at the top
marginal tax rate, without the medicare levy (currently 47%).
However, if the trust is established under a will, the tax Commissioner has discretion to apply section 99
ITAA36 instead. If section 99 ITAA36 applies, the ordinary non-resident individual marginal tax rates would
apply – because the trustee of the estate trust is a non-resident. Both deceased estates and testamentary
trusts should come within the ambit of this discretion.
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Double taxation agreements
The application of Australia taxation to the trustee is subject to the operation of any relevant DTAs. If they
apply, taxing rights will be allocated to different classes of income accordingly.
Accumulation phase – taxation of beneficiaries
Although distributions or benefits may not have been provided from the non-resident trust to Australian
resident beneficiaries, it is possible that certain income and gains could be attributed back to Australian
resident beneficiaries. From the 2010-11 income years, this attribution occurs via the operation of two
possible taxing regimes. These are:
• the transferor trust rules; and
• the controlled foreign company (“CFC”) rules.
The transferor trust and CFC regimes are aimed at countering tax avoidance, so their application to estate
trusts is quite limited. In particular, the transferor trust and CFC rules will not apply in situations where:
• the deceased estate/testamentary trust has been established by the operation of a will; and
• no Australian resident has, or is deemed to have, transferred property or services to the trust.
Distribution phase
During the distribution phase, it is generally the beneficiaries of a non-resident estate trust who will be taxed
on distributions. Exceptions to this would include distributions made to beneficiaries under a legal disability.
These are the same types of exceptions that would apply to situations where a trustee is taxed instead of a
trust beneficiary on normal trust distributions. Assuming that the relevant beneficiaries are adults with full legal
capacity, the taxation burden will lie on the beneficiaries to whom distributions are made.
When determining the taxation liabilities of beneficiaries it is best to analyse them in the following order:
•
taxation of current year income to which beneficiaries are presently entitled – this will include present
entitlement during the income year and within two months of the end of the income year;
•
taxation of other distributions or deemed distributions – this will include primary taxation and certain
penalty taxation; and
• accruals rules.
Cost base on assets distributed in specie
When an Australian resident beneficiary acquires an asset from the estate of a deceased person who is
a non-resident, the cost base rules are largely the same as if they had received the distribution from a
deceased Australian resident.
However, there will be a difference if there is a distribution of an asset which is not taxable Australian property
and is not trading stock. If this type of asset was distributed from the estate of an Australian resident, the
first element of the beneficiary’s cost base would be the deceased’s cost base in the asset. However, if the
distribution was from a non-resident the first element of the beneficiary’s cost base would be the market
value of the asset at the time of the deceased’s death.
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Other non-resident issues
Legislation to remove the availability of the 50% CGT discount for non-resident and temporary resident
individuals received royal assent in 2013. The 50% CGT discount was previously available to any individual
deriving a taxable capital gain on the disposal of an asset held for more than 12 months, regardless of
residency.
The amendments apply to discount capital gains included in the assessable income of an individual,
irrespective of whether the CGT asset producing the gain was owned directly by the individual or held
indirectly by a trust.
The amendments also reduce the discount percentage applicable to a discount capital gain made after
May 8, 2012 by a trustee that is taxed under section 98 ITAA36 in respect of an individual beneficiary who
was a foreign resident or temporary resident for some or all of the period that the CGT asset was held. In
circumstances where a trustee is taxed under section 98 ITAA36, the discount percentage will be worked out
on the basis that the individual beneficiary made the gain.
“Temporary residents” and non-residents will still be entitled to a discount on capital gains accrued prior to
May 8, 2012, provided they choose to obtain a market valuation for their assets as at that date. However,
individuals who do not have a market valuation will be ineligible for the CGT discount on pre-announcement
gains. This is regardless of whether the individual made the discount capital gain directly or as a result of
being a beneficiary of a trust.
It should be noted that, while foreign residents and temporary residents are only subject to CGT in relation to
TAP, the definition of TAP not only includes land in Australia (whether held directly or indirectly), but also any
other asset that an individual who was an Australian resident has elected to defer the taxing point on when
ceasing to be an Australian resident.
What does this mean for the beneficiaries of deceased estates?
Where all, or a significant portion, of the capital gain accrued prior to May 8, 2012, it is likely to be beneficial
to obtain an independent market valuation of the asset at that date to maximise access to the 50% CGT
discount. However, this may become more difficult (and costly) as time passes. As such, it may be prudent to
consider obtaining valuations of assets held now in anticipation of a capital gain being derived in the future.
Further complications will arise where the capital gain has originated in a deceased estate in which the
individual is one of a number of beneficiaries. In these cases, it may be difficult to obtain this information from
the trustee. These changes may also affect those individuals who depart Australia, cease residency for a
number of years and then return to Australia shortly before they die. If the individual holds real estate which
is subject to CGT (for example, an investment property of family home which only qualifies for a partial main
residence exemption), the 50% CGT discount will be reduced on the ultimate sale of the property by either
the estate or a beneficiary who inherits the property.
Trustees, especially trustees who are assessed under sections 98 and 99 ITAA36, will need to give
consideration to:
•
the discount percentage of any beneficiaries to ensure that the trustee withholds sufficient amounts in
relation to any distributions;
•
obtaining market valuations as at May 8, 2012 of all of the CGT assets (in the case of “non-fixed” trusts)
or all assets that constitute TAP (in the case of a “fixed” trust); and
10
• the provision of detailed distribution statements to beneficiaries setting out:
− the acquisition date of all CGT assets disposed of and their date of disposal in order to determine the
discount testing period; and
− the market valuation of all of the relevant CGT assets as at May 8, 2012.
4.5
Taxation of pensions and retirement benefits
4.5.1Overview
Australian pensions and retirement benefits (“superannuation”) are regulated both by income tax law and
the Superannuation Industry Supervision (“SIS”) Act. There is a concessionary regime applied to the taxation
of Australian superannuation. “Concessional contributions” are tax deductible to the contributor (subject to
a cap – currently AUD 35,000 per annum) and are taxed in the superannuation fund (usually at the rate of
15%). Contributions in excess of this cap are taxed at the individual’s marginal tax rate.
“Non-concessional contributions” (“NCCs”) can also be made to the superannuation fund. These are not tax
deductible to the contributor and tax free in the superannuation fund but are also subject to a contribution
cap (currently AUD 180,000 per annum) to avoid incurring excess contributions tax. A revised tax treatment
applies to excess non-concessional contributions made in the 2013-14 and subsequent financial years.
Generally, the individual can elect to have excess NCCs and his/her associated earnings released from
super. The associated earnings calculated on the individual’s excess NCCs released will be taxed at his/
her marginal tax rate (plus Medicare levy), while the excess NCCs will be released tax-free. Alternatively,
an individual can retain his/her excess NCCs in his/her super fund and have the excess contributions tax
treatment apply as usual i.e. taxed at the top marginal tax rate of 49% currently.
The abolition of compulsory cashing rules and of tax on benefits paid to superannuation fund members who
reach 60 years of age means that the treatment of superannuation benefits upon death becomes a major
planning issue.
4.5.2 Tax treatment of death benefits
Superannuation death benefits (paid from a taxed superannuation fund) are taxed differently depending on a
number of factors as follows:
• whether the recipient is a “dependent” for tax purposes;
• the components of the death benefit; and
• whether the death benefit is paid as a lump sum or a pension (“annuity”).
A “dependent” for tax purposes is any of the following:
• the member’s spouse;
• the member’ s child aged less than 18 years;
• a person with whom the member had an “interdependency” relationship;
• any other person who was a dependent (including a financial dependent).
11
A superannuation fund death benefit can consist of two components comprising a “taxed” and an
“untaxed” (not subject to prior taxation) element. A superannuation fund death benefit can be paid into a
special purpose “superannuation trust” established under a will. The trust can access the tax exemptions
associated with death benefit payment provided the beneficiaries are death benefit dependents of the
deceased. A “superannuation proceeds trust” may also be established by a will which would provide for the
superannuation death benefit to be paid to a minor with investment income taxed at normal adult rates.
Lump sum death benefits
The following table sets out the relevant tax treatments:
Beneficiary
Tax-free component
Taxable component
Taxed element
Untaxed element
Dependent
Tax-free
Tax-free
Tax-free
Non-dependent
Tax-free
17%
32%
If the death benefit is paid to the deceased’s LPR, the taxation treatment will depend on what the LPR does
with it. An important planning strategy (“re-contribution”) revolves around increasing the tax-free component
in a members account before his/her death, thus reducing the taxable component and any resultant tax
payable by a non-dependent beneficiary recipient. Pre-death withdrawals are also a further tax reduction
strategy to consider provided certain release conditions are met.
Death benefit pensions
The tax treatment of death benefit pension income will depend on the age of the deceased at the date
of death and, if the deceased was under 60 years of age, the age of the beneficiary. This is set out in the
following table:
Age of
deceased at
date of death
Under 60
60 and above
Age of recipient
at date of
payment
Tax-free
component
Taxed element
Untaxed element
Under 60
Tax-free
MTR* less 15% tax
offset
MTR*
60 and above
Tax-free
Tax-free
MTR* less 10% tax
offset
Any age
Tax-free
Tax-free
MTR* less 10% tax
offset
*“MTR” = marginal tax rate including medicare levy.
12
Taxable component applies if the beneficiary
is a dependent or the reversionary pension
commenced to be paid before July 1, 2007
If the income stream containing the taxed element is rolled over and used to purchase another income
stream, the beneficiary will lose the ability to claim the 15% tax offset until he/she has reached the
“preservation age”, as the new income stream will break the nexus with death. A death benefit pension
cannot commence to be paid on or after July 1, 2007 to a beneficiary who was not dependent on the
deceased member for tax purposes.
4.5.3 Capital gains tax on disposal of pension assets
The disposal of assets such as shares and property that are being used to support the payment of a pension
are currently exempt from taxation. If the pension reverts upon the death of a primary pensioner, the assets
supporting the pension remain in “pension phase” and thus continue to be exempt. Further, if the pensioner
dies and no reversionary pensioner exists, the tax exemption for earnings on assets supporting pensions will
continue following the death of the pensioner, until the deceased pensioner’s benefits have been paid out of
the fund (subject to these being cased as soon as practicable).
4.5.4 Commutation of death benefit pensions
It is possible to commute a death benefit pension to a lump sum provided this is done before the later of:
• months from the date of the deceased’s death; or
• 3 months from the date of grant of probate on the deceased’s estate.
Subject to extension are certain uncontrollable events such as a legal challenge over entitlement to the
benefit. Payments outside these time limits will not be taxed as death benefits but as if the beneficiary was an
ordinary member of the superannuation fund.
4.5.5 Employer payments made after the death of an employee
Payments made by an employer after an employee’s death form part of the deceased’s estate, with the
beneficiaries determined in accordance with the deceased’s will. A benefit paid by an employer for an
employee who has died will be treated as a death benefit termination payment (as long as it does not
represent payment for unused leave entitlements). Such a payment can consist of one or two components
comprising a tax-free component and a taxable component. The tax-free component comprises the pre-July
1983 segment of the payment and the invalid segment of the payment. The taxable component comprises
the balance.
Each component will be taxed depending upon whether the beneficiary is a dependent or a non-dependent
beneficiary for tax purposes as follows:
Beneficiary
Tax-free component
Taxable component
Dependent
Tax-free
First AUD 195,000: tax-free, excess: 49%*
Non-dependent
Tax-free
First AUD 195,000: 32%*, excess: 49%*
*If the marginal tax rate of the beneficiary is less than the rates in the table above, the tax on the taxable
component will be reduced to the marginal tax rate of the beneficiary.
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4.5.6 Binding death benefit nominations (“BDBNs”)
A BDBN can allow a member’s superannuation death benefit to be paid to specified nominated persons. This
provides the member and the beneficiary with certainty as to distribution of funds on death of the member.
Further, if dependents are nominated (rather than the member’ s LPR) the benefit will not be paid to the
deceased’s estate and therefore would not be subject to challenge under the will.
There are a number of strict conditions to be met when completing BDBNs and failure to execute them
properly could cause them to be invalid, with potential detrimental consequences for the nominated
beneficiaries. This has been the case in a number of recent court decisions in Australia. Also BDBNs can be
overridden in by the courts in certain family law related dispute orders.
BDBNs usually need to be renewed after three years, although a more recent trend has been for “nonlapsing nominations” to be executed.
If there is no BDBN in place and no direction in the superannuation fund trust deed, the trustee may use
its discretion to determine who will benefit from the superannuation death benefit. This discretion must be
properly exercised and take account of all reasonable matters to ensure an equitable outcome is achieved,
but essentially gives the trustee the final say on where the benefits are to go.
4.6Consequences of income tax, especially in the case of a relevant share holding
in a corporation
4.6.1 Non-residents subject to CGT only on sale of TAP assets
TAP assets comprise:
• direct and indirect interests in Australian real property;
• direct and indirect interests in Australian mining, quarrying and prospecting rights;
• an asset that has been used at any time in carrying on a business via a permanent establishment in
Australia;
• an option over one of the above; or
• an asset subject to an election for CGT rollover following an individual becoming a non-resident for
Australian tax law purposes.
The disposal of shares (comprising a non-portfolio interest of 10% or more) by a non-resident in a company
carrying on an active business with no or limited (<50%) real estate assets would not attract CGT in Australia.
4.6.2 Testamentary trusts
A testamentary trust is a trust established under a will, therefore it can only come into existence after a
testator’s (“willmaker’s”) death. This can provide some significant benefits in the form of tax advantages and
asset protection for the primary beneficiary under the will.
Tax advantages
• “Excepted trust income” – the main advantage is that the income of the trust (“excepted trust income”)
can be distributed to minor beneficiaries (under 18 years) and taxed at normal progressive rates (including
tax free threshold) instead of the penalty rates that would otherwise apply to minors receiving such income.
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• The streaming of different classes of income to different beneficiaries to minimise tax.
• Distributions of pre-tax income to tax exempt entities.
• Distributions to lower taxed adult beneficiaries.
• No CGT on passing of assets owned by deceased transferred to beneficiary of a testamentary trust.
Other advantages include protection from creditors in a bankruptcy situation, protection from divorce,
protection from beneficiary claims or wasteful behavior. Disadvantages include costs (set up and ongoing),
loss of main residence exemption if main residence is held in the trust, “family trust elections” restricting class
of beneficiaries, land tax, issues associated with control over the trustee.
The “appointor” of the trust has the power to appoint and remove the trustee of the trust, therefore care
should be taken when nominating the appointor and when drafting the appointor clause.
4.6.3 Other concessionally taxed estate trusts
In addition to establishing trusts under a will, special types of trusts can be set up using inheritance received
from a deceased estate or the proceeds of a superannuation death benefit. If properly structured, these
trusts can provide some of the benefits that apply to testamentary trusts discussed above, in particular the
ability for minor beneficiaries to receive excepted trust income. These include:
• estate proceeds trusts;
• superannuation proceeds trusts;
• insurance proceeds trusts;
• employment benefit trusts; and
• special disability trusts.
4.6.4 Family trusts
The term “family trust” does not have a legal meaning, but essentially describes an “inter vivos trust” – a trust
established by deed and created during the person’s lifetime with fixed or discretionary entitlements, and may
have substantial assets accumulated in it at the time of death of the primary family beneficiary (usually the
patriarch or matriarch). These trusts usually (but not always) have a fixed vesting day under relevant state law.
It may be possible to extend this day by application to the court in certain circumstances. For discretionary
trusts, a broad range of family members (and associated entities) are nominated in the general class of
discretionary beneficiaries.
Key roles are that of the “trustee”, “appointor” and “guardian”. Who will take on these roles following the
death of the primary beneficiary will be of critical importance. It is critical to determine who will act as trustee
of the family trust, as such person will determine who will benefit under the trust. The trustee can be removed
by the appointor, so its role is arguably more important than the trustee role. The successor for this role will
be crucial from an estate and succession planning perspective.
The guardian (if there is one) will usually need to be consulted and provide approval under the deed on any
major decisions, such as a conferral of capital of the trust fund to nominated beneficiaries, and thus this is a
very important role.
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Care needs to be exercised when amending any clauses in a deed to provide a preferred succession
outcome so that no CGT, stamp duty or trust resettlement ramifications will arise.
“Trust splitting” may be a succession option where the intention is to pass control of different assets in the
trust to different beneficiaries. This involves the appointment of separate trustees over different assets within
a single trust. As no new trust is created, there should not be a CGT liability arising out of this strategy.
However, care needs to be exercised when completing a trust split and careful review of the trust deed and
trust assets and liabilities (including loans to and from family beneficiaries and related entities – and how
these are to be dealt with) is required.
B. Civil law
Please note: Australia is a common law jurisdiction.
1.
Asset transfer at lifetime/donation
A gift to another person does not itself attract any taxation consequences. However, if certain assets such
as real property or shares are gifted then these types of assets are subject to capital gains tax and stamp
duty. Each state and territory in Australia has different laws that apply with regard to stamp duty; such duty is
generally payable by the transferee. Capital gains tax is a federal tax and is applicable Australia wide; tax on
the disposal of assets is payable by the transferor.
Gift of real property between spouses may be exempt from stamp duty depending on which state the
property is owned in. For example in Victoria it would be stamp duty exempt, however, in Queensland and
NSW the exemption to stamp duty only applies to the residence of the married couple.
Gifts/donations to charities will attract a tax deduction for the individual making the gift, limited to the amount
of your taxable income for the year.
If an individual is on a government pension and makes a gift greater than AUD 10,000 over three years, his/
her pension may be reduced or cease entirely.
2. Basic transfer mortis causa/right of succession
In Australia an individual has the right to leave his/her assets held in his/her personal name to anyone he/she
wishes, including family, friends or charities.
2.1 Legal order of succession
Australia does not have forced heirship laws. However, if a person dies without leaving a valid will, then the
intestacy laws of the state or territory of the deceased’s domicile will dictate how the person’s assets will be
distributed. Generally, the next of kin will be entitled, and if more than one qualifies in accordance with the
law, then they will be equally entitled.
For example: If a person dies in Victoria without a will and is survived by a spouse and two children the
estate will be distributed as follows:
• AUD 100,000 and personal chattels to the spouse;
• 1/3 of the balance of the estate to the spouse;
• 2/3 of the balance of the estate to the two children equally.
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2.2 Testamentary succession
Any person over eighteen years of age who has the required testamentary capacity may prepare a will in
Australia. If under 18 years of age, the person may only make a will with court approval.
2.3 Types of testamentary dispositions
2.3.1 Last will
A will is a written document which declares how the estate assets are distributed on someone’s death.
Preparing a valid will
For a will to be valid each state and territory sets out the requirements in legislation.
For example in Victoria without the interpretation of a court, a will must meet a number of legal requirements.
These requirements are set out in “The Wills Act 1958 (Vic)” and include:
• testator (“willmaker”) must be at least 18 years of age (unless married or has obtained permission of the
court);
• willmaker must have testamentary capacity to make a will;
• be in writing;
• signed by the willmaker and witnessed by at least two independent individuals over 18 years of age who
are not vision impaired (the witness must be able to see the testator sign his/her name on the will); and
• when signing the will the willmaker must sign it with the intention that he/she is executing his/her will.
Informal wills
Certain informal writings can be approved as a will by the Supreme Court of Victoria even though they do not
meet the formal requirements of the Wills Act. It is important to remember that even if an informal will is held
to be valid by the court this does not mean that the terms are certain or satisfactory. You may need to obtain
further instructions from the court as to the interpretation of the will. Obtaining court approval can be costly
and often difficult, informal wills should be avoided.
Court made wills
Each state and territory also authorises the superior court in their jurisdiction to make a court made will on
behalf of an individual who does not have the required testamentary capacity to prepare a will itself. The Wills
Act in Victoria for example empowers the Supreme Court of Victoria to authorise a will to be made on behalf
of a person who does not have testamentary capacity.
The law allows any person to make an application for a statutory will on behalf of another person. When
considering whether a will should be made for an incapacitated person the court will consider what the
intentions of the person might reasonably be expected to be.
What happens if an individual dies without a valid will?
If you die without leaving a valid will (“intestate”) then your assets will pass in accordance with intestacy laws.
Each state and territory has prescribed distribution which is set out in legislation.
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The distribution of assets on intestacy in Victoria is set out in the “Administration and Probate Act 1958 (Vic)”
(“the Act”). These provisions can give rise to some very unsatisfactory distributions of your assets.
2.3.2 Testamentary contract
This is not a concept in Australia.
2.4 Legacy
“Legacy” is a gift of personal property by will. Originally used to describe a gift of money but now used
generally to describe any gift of personal property.
“Bequest” is a specific gift of personal property to a nominated beneficiary.
“Devise” is a gift of real estate.
2.5 Conditions
This is not a concept in Australia.
2.6 Usufruct
In Australia we do not have the concept of usufruct, however it is very similar to a trust recognised in
Australia known as a “life interest”.
A life interest is a trust which holds an asset for the benefit of an individual (“life tenant”) for his/her life time.
Although the life tenant is entitled to receive the income generated from the trust such as rent, interest or
share dividends, he/she is not generally entitled to the capital of the trust assets, unless the terms of the life
interest authorises the advancement of capital for the life tenant’s benefit. The capital held in a life interest is
generally preserved for the benefit of the remainder beneficiaries who are entitled to receive the capital held in
the life interest upon the death of the life tenant.
2.7 Form of testamentary dispositions
A will is the only form of testamentary disposition recognised in Australia. A will is a personal document and
therefore cannot be made jointly with a spouse, however, spouses may choose to execute mirror wills and
enter into a mutual will agreement. A mutual will agreement is an agreement between spouses which binds
the survivor of them to the terms of their last will and mutual will agreement and as such cannot change the
terms of their will and not dispose of assets so as to defeat the terms of the will and mutual will agreement.
If the surviving spouse does not comply with the mutual will agreement then the beneficiaries of the will who
have suffered a loss because of the actions of the surviving spouse have the right to enforce the terms of the
mutual will even though they were not a party to the agreement. Their rights are equitable.
2.8 Right to a statutory share
There is no statutory right to a share of a person’s assets in Australia. However, although an individual
can leave his/her estate to anyone he/she chooses, if he/she leaves someone out of his/her will who he/
she should have provided for, then the courts may ultimately determine who will benefit from such estate.
Generally speaking, spouses, children and individuals who can demonstrate financial dependence on the
deceased at his/her time of death may challenge a will if they can demonstrate that they have not been
adequately provided for.
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Those individuals who can challenge the provision of a will are set out in legislation in each state and territory.
Australia does not have federal succession laws and therefore if someone has been left out of a will and
believes he/she should have been provided for it is important to determine which jurisdiction applies.
2.9 Family foundation/trusts
As a common law jurisdiction, Australia recognises the concept of trusts. Trust law in Australia is a
combination of common law principles (court made decisions) and legislation. A trust is an entity created
to hold assets for the benefit of certain persons or entities (“beneficial owner”), with a trustee managing
the assets of the trust (“legal owner”). Most trusts are founded by the person (“settlor”) who executes a
written deed of trust which establishes the trust and sets out the terms and conditions upon which it will be
administered. When a testamentary trust is established the settlor is replaced by the willmaker.
Types of trusts
There is not one form of a trust. The most common forms of trusts include discretionary trusts (“family trusts”)
and unit trusts (“fixed trusts”).
Trusts can be established either during a person’s life time (“inter vivos”) or on a person’s death, established
in accordance with the terms of a person’s will (“testamentary”).
What is a testamentary trust?
A “testamentary trust” is a trust established by a person’s will. It can be a fixed trust, a discretionary trust, or
a hybrid (combination of both fixed and discretionary entitlements).
Common types of testamentary trust
• Life interest (assets held for the lifetime of the beneficiary; assets never form part of the estate of the
beneficiary, the beneficiary is generally only entitled to income generated from the assets for his/her
lifetime and on the beneficiary’s death the assets are distributed to the remainder beneficiaries named in
the will);
• Right of residence (right to occupy a property for the person’s lifetime or term stipulated by the will);
• Protective or vulnerable beneficiary trust (a trust created to protect the interests of a vulnerable
beneficiary, e.g. a disabled child or a child with a gambling or drug addiction);
• Testamentary discretionary trust (created by the terms of a person’s will, it has a trustee, a range of
potential discretionary beneficiaries (such as spouse, children and grandchildren related companies or
charities) who are entitled to receive income and/or capital of the trust at the trustee’s discretion, and in
many cases an appointor who holds the power to appoint and remove the trustee); and
• Charitable trust (a trust created for the benefit of either charitable purposes or specifically named
charities).
2.10 Execution of the will
Generally speaking, in Australia there is a requirement for a will to be in writing and signed before two
independent adult witnesses. There is no formal requirement for the will to be signed before a notary or a
lawyer.
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3. Transnational aspects
Australia is a signatory to the UN Convention on international wills.
Australian courts will recognise a validly executed international will and unlike in the circumstances where
there is only a foreign will or foreign heirship laws, no additional evidence by way of an affidavit will be
required from a lawyer of the country of origin to provide evidentiary proof that the will was prepared and
executed in accordance with the laws of that country.
Law on succession
When a person dies leaving assets in Australia, the appointed executor or the person with the greatest
interest in the deceased person’s estate will be required to obtain a grant of probate in the state or territory
where the assets are owned.
Australian courts will recognise a valid foreign will and/or foreign heirship laws for the purpose of obtaining
a grant of probate or letters of administration to deal with the Australian assets. It is important to note that
a grant of probate or letters of administration will be required in each state and territory where the assets
are owned (“reseal of probate”). However, if the deceased willmaker only owned publicly listed shares in
Australia, then probate will be required in only one state as Australia has recognition laws in place in relation
to publicly listed shares.
Although Australian jurisdictions will recognise foreign wills it is always recommended that individuals with
assets in Australia prepare either an international will or have a will prepared in Australia.
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Austria
A.
Tax law
1.
General Overview
As there are no inheritance or gift taxes applicable in Austria at the time of the release of this book we will
focus on other taxes in connection with the transfer of real estate in the Austrian tax part. From today’s
perspective a reintroduction of inheritance or gift taxes is not to be expected medium-term.
We will also give you an overview about the possibilities of using an Austrian trust called “Privatstiftung” in
connection with real estate.
2.
Real estate transfer tax
The regulations concerning the taxation of transfer of real estate are laid down in the Real Estate Transfer
Tax Law (“RETT”) (“Grunderwerbsteuergesetz – GrEStG”). RETT is subject to a drastic change and new
formulation due to the tax reform 2015/2016 – the new formulation will enter into effect as of January 1,
2016. All kinds of acquisition of real estate transfer – be it against payment or without consideration – will be
subject to RETT.
Our remarks will focus on the acquisition of real estate by natural persons through inheritance or donation.
Each of these transfers of real estate between natural persons is subject to RETT and therefore a taxable
event. Both types of transfers are regarded as transfer without consideration as usually there is no
consideration or purchase price to be paid by the donee or heir.
2.1
Taxable event
The transfer is effectuated through the finalisation of the obligation transaction – in cases of donation this will
be the written donation contract. In cases of inheritance the obligation transaction is the transfer of property
to the heir(s). The actual transaction which is effected by the entry in the official land register is not relevant
for RETT.
2.1.1Inheritance
At first we want to look at the acquisition of real estate by heir(s) through inheritance. For the purposes of
RETT this type of taxable event is always deemed “without consideration”. This classification is important as
it determines the tax base and the tax rate.
2.1.2 Donation/transfer between family members
The second type of taxable event is a transfer of real estate between family members. Any kind of transfer
is treated as a donation between family members – even if there is a trade-off and even if the real estate is
purchased between family members. This legal fiction has considerable consequences regarding the tax
base and the tax rate.
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Family members concerning the Real Estate Transfer Law are the following:
Parents, grandparents and great-grandparents; siblings and their children; spouses and registered
partners; children, stepchildren and adopted children together with their spouse and their children;
stepparents, parents-in-law and adoptive parents. As you can see from the description “family members”
are widely defined in the relevant law which means that a lot of real estate transfers will be deemed without
consideration.
2.1.3 Donation
The third relevant type of transactions are donations between non-family members. This can either be
fully without consideration or partly without consideration if there is some kind of trade-off. In case of a
transaction with some kind of trade-off the transaction is divided in one part without consideration and one
part with consideration which is treated like a purchase of real estate. The part without consideration is taxed
as described in the following chapters. For the part with consideration RETT in the amount of 3,5% (see also
paragraph 2.3.) has to be paid on the purchase price (= tax base for transfers with consideration).
2.2 Taxable persons and taxable assets
Tax liability is linked to the natural persons forming part of the transfer. Therefore, in case of inheritance the
heir is the person liable to pay the tax. In case of donation both parties involved are liable to pay the tax. Of
course usually it is agreed that the acquirer is liable to pay the tax.
Taxable assets are: real estate including buildings, building rights and buildings on third party land.
2.3 Tax base
Tax base for all kinds of acquisition without consideration is the so called “Grundstückswert” – a value for the
premises including buildings defined in the relevant law. There are two ways encoded in the relevant law to
calculate the real estate value.
One calculation is based on values for the land and the building which are multiplied with a regional factor.
The basic value is imposed by the tax authorities in irregular time intervals and stated in a tax assessment.
The regional factor depends on the market prices for real estate in the various regions in Austria.
The second way is to calculate the value of the real estate on the basis of a price comparison list issued by
non-governmental institutions.
The third option which is available to taxpayers – instead of the two encoded ways – is to obtain an official
expertise from an authorised expert.
For the sake of completeness we would like to point out that for all transactions with consideration the
agreed-upon purchase price for the real estate is the tax base for the calculation of RETT. This is of some
relevance for the taxable event described under paragraph 2.1.3.
2.4 Tax rate
The Austrian law on RETT specifies two kinds of tax rate. The first tax rate is a flat rate of 3,5% of the
purchase price. This tax rate is applicable for all transactions which are treated as transactions with
consideration.
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The second tax rate is a progressive tax rate which is applicable for all transfers (or parts of transfers) without
consideration. The tax rate of 0,5% applies to the real estate value amounting from EUR 0 to EUR 250,000,
2,0% from EUR 250,001 to EUR 400,000 and 3,5% from EUR 400,001 on.
Please note, however, that all acquisitions without consideration between the same natural persons as well
as acquisitions concerning the very same economic entity are added up during a period of 5 years. This
means that it is not possible to split donations to achieve a tax advantage using the progressive tax rate.
2.5 Calculation and payment of RETT
RETT is calculated by the lawyer or notary public who is appointed with the contractual carrying out of
the transaction. The regular process is that the lawyer or notary public calculates the tax and also pays it
on behalf of the acquirer to the tax office. This process is especially used as it allows the acquirer to be
registered in the official land register quickly. If the tax is not calculated and paid by the authorised person a
tax return has to be filed and the entry into the land register is delayed considerably.
2.6 Land register entry fee
Together with RETT there is also another fee which is due upon any form of acquisition of real estate. The fee
for the entry in the official land register amounts to 1,1% of the assessment basis. The assessment basis in
case of acquisitions without consideration is again the real estate value as described in paragraph 2.3.
As RETT the fee is usually calculated and paid to the relevant authority by the lawyer or notary public.
3.
Real estate capital gains tax
The second important tax concerning the transfer or sale of real estate is the capital gains tax on the profit
from the sale of real estate. First introduced in 2012 this tax ensures that all sales of real estate are taxable.
With the tax reform 2015/2016 the Austrian government adapted the tax code extensively and also the real
estate capital gains tax, (“Immobilienertragsteuer”). For the purpose of this handbook this tax is important as
often heirs or donees sell real estate after the acquisition.
3.1
Concept
As already described above all sales of real estate are subject to the Austrian real estate capital gains tax.
Only if an exemption is applicable the sale is tax free. There is a flat tax rate of 30% on the profit, also with
special regulations.
One central point is that there is an important date included in the tax law which has a massive influence on
the tax base and the tax rate. This date is April 1, 2002 – this date marks a limit if the real estate is deemed
as “old asset” or “new asset”. This classification depends on the last acquisition against payment of the real
estate. Therefore in case of inheritance or donation the classification depends on the last acquisition of the
legator or donator or even before if the legator or donator was an heir or donee himself.
To illustrate the classification we would like to give you the following example: A real estate is donated in
2016 from a father to his daughter. The father received the real estate through heritage from his mother in
1995. The mother bought the real estate in 1975. As the last acquisition against payment was in 1975 the
real estate is deemed “old asset” as this date was well before April 1, 2002.
In case the father bought the real estate in 2003 it would be deemed “new asset” as the last acquisition
against payment was in 2003 and thus after April 1, 2002.
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3.2 Exemptions
There are two important exemptions from the real estate capital gains tax – one for the sale of the principal
residence and one for the sale of self-constructed buildings. The difference is that the first exemption
includes the premises and buildings whereas the second one only exempts the building from taxation.
Precondition for both exemptions is that the requirements are fulfilled by the seller of the real estate. In case
of a preceding acquisition without payment the requirements would have to be fulfilled by the heir or the
donee. Therefore the exemption for self-constructed buildings cannot be applicable in case of inheritance
or donation. There is only one possibility for heirs or donees to benefit from the tax exemption: they have
to have used the building as their principal residence for 5 years within the last 10 years before the sale of
the real estate. In all other cases heirs or donees will have to pay real estate capital gains tax after they have
received the real estate and sell it.
3.3 Tax base
Depending on the above described classification as either “new asset” or “old asset” two different tax bases
are applicable.
In case of an “old asset” the tax base will be the selling price of the real estate.
In case of a “new asset” the tax base will be the profit achieved by the sale of the real estate. To calculate the
profit the so-called adapted acquisition costs will be deducted from the selling price. In case of inheritance
or donation the acquisition costs are also transferred together with the real estate – this means that the
acquisition costs of the legator or donator have to be used by the heir or donee. In case the real estate was
used as a rental object the depreciation reduces the acquisition costs leading to the adapted acquisition
costs and therefore to a higher taxable profit. As this calculation process can be quite difficult we recommend
to get assistance from a tax advisor to make sure the calculation is correct and the correct tax base is used.
3.4 Tax rate
As there are two tax bases there are also two tax rates – both tax rates are flat rates.
The first tax rate is 4,2% and is applicable to the sale of “old assets”. This tax rate is applied to the tax base
in form of the selling price.
The second tax rate is applicable to the sale of “new assets” and amounts to 30%. This tax rate is applied to
the tax base in form of the profit. Of course also in case of the sale of “old assets” the regulations for “new
assets” can be used voluntarily upon the request of the taxpayer.
3.5 Calculation and payment of real estate capital gains tax
The basic process for the real estate capital gains tax is the calculation by the lawyer or notary public
together with RETT. The lawyer or notary public will calculate the tax – in more difficult cases with the support
of tax advisors – and then pay the tax to the tax office. This means that the payment of the real estate capital
gains tax is a final taxation and no further tax returns or filings are required by the seller.
The lawyer or notary public will usually deduct the tax from the selling price and only the net price will be paid
out to the seller.
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4.
Overview of the Austrian trust “Privatstiftung”
As last topic in the Austrian tax part we would like to give you a short overview of the Austrian “Privatstiftung”
in connection with real estate. This special form of a trust is regularly used in connection with fortune and
especially real estate to avoid problems and disputes in cases of inheritance.
Basically the founder donates the fortune to the trust which is a special form of legal entity. The trust is not
dissolved in case of death of the donator and therefore can be used to make the fortune independent.
The donator can stipulate beneficiaries in the documents of the trust – the beneficiaries will then receive
benefits from the trust based on the trust certificate and the decisions of the trust directorate.
The trust requires a minimum contribution of EUR 70,000 in cash and other fortune or only fortune which
then has to be audited mandatory.
As the “Privatstiftung” is deemed as legal entity the Austrian corporate income tax law is applicable to this
form of trusts. A payout of distributions from the trust to the beneficiaries is always subject to a flat capital
returns tax of 27,5%.
4.1 Contribution of real estate in Privatstiftungen
Real estate is mainly contributed into the trust in the way of dedication by the founder. This dedication is
deemed without consideration according to paragraph 2.1.3. Therefore the tax base for the foundation of
real estate is the value of the real estate according to paragraph 2.3. and the progressive tax rate according
to paragraph 2.4. is applicable.
Additionally a special tax of 2,5% is added to the progressive tax rate. This means that for real estate with a
value exceeding EUR 400,000 the total tax rate is 6% (3,5% plus 2,5%). On top of that also a land registry
entry fee has to be paid.
In case the founder sells the real estate to the trust the transfer is deemed as sale – RETT amounts to 3,5%
of the selling price then and no additional tax of 2,5% is levied. On the other hand the founder is subject to
the real estate capital gains tax according to paragraph 3.
4.2 Ongoing taxation of real estate in Privatstiftungen
Regarding real estate two phases of taxation have to be distinguished. The ongoing income from the rental
of real estate is taxed with the flat corporate income tax rate of 25%. Profits from the sale of real estate are
basically taxed as described in paragraph 3. However, the tax rate remains at 25%.
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B.
Civil law
Prepared by Ms. Elisabeth Schmidl, lawyer in Vienna ([email protected]; www.elisabethschmidl.at),
with a focal point in real estate transaction.
1.
It is a gift, if the donor’s assets enrich the receiver without any remuneration. The intention of both parties is a
basic requirement.
Notarisation is not required, as long as the gift has already been transferred or if the subject is handed out
together with the donation agreement. Example: Donations which are immediately fulfilled (the immediate
transfer of the subject of donation) do not require any particular form. If the gift is not transferred immediately,
the donator has to choose the notarial act. The necessity of this special form has a warning function. The
form of a notarial act minimises the risk of an inconsiderate gift.
The donation may also be associated with a condition. Such conditions may withhold some indirect influence
in respect of the further destiny of the gift. Furthermore, the donator could preserve his/her right to regain the
gift or implies special rights of revocation.
1.1Usufruct
If a person wants to donate an asset during his/her lifetime but wants to preserve all rights of use, he/she
may place the burden of usufruct on the covenantee. The usufruct is comprehensive which means that the
usufructuary has the full right to the fruits, usage and advantages of use of the object. For example, he is
entitled to continue to live in the real estate or rent the same. In return, the usufructuary could be obliged to
maintain the economic condition of the property.
1.2
Right of residence
The right of residence is a subtype of usufruct and means that the donator only preserves his right to occupy
the house.
2.
Basics of transfer mortis causa/right of succession
The right of succession is a personal and a basic right at the same time. It allows people to make
dispositions to determine the succession after death or to ensure a legacy. The Austrian Civil Code (“ABGB”)
stipulates the possibility to make a will on one hand and the statutory right of succession of relatives on the
other hand.
2.1
Legal order of succession
The estate of a deceased person consists of all assets – real estate and chattels. All these assets together
become subjects of succession. This “estate” does not only include the testator’s rights in rem (belongings,
property, liens) but also his/her obligations and liabilities. Generally, the principle of universal succession
applies. According to that principle, each testator has only one or a few successors. The testator may pass
all assets and liabilities as a whole. This is why heirs do not have to enter into the inheritance and have the
possibility to submit a so-called “conditional declaration of acceptance of the inheritance”. This universal
succession takes place without participation of the successors or other intermediate third parties. In this
respect, the principle of hereditary succession applies.
26
This leads to the fact that acquisition takes place notionally at the time the testator deceases. The origin of
this regulation lies in the basic concept of the testator’s post mortal responsibility for family members. This is
why the law provides the statutory succession of relatives and spouses or registered life partners. So, if the
testator does not avail himself/herself of a testamentary succession, his/her heirs will be determined by law.
In the sense of succession law, relatives are primarily persons that descend from each other. Heirs of first
order are the testator’s descendants, i.e. children, grandchildren and great-grandchildren. Heirs of second
order include parents and their descendants (i.e. brothers or sisters).
Besides the right of succession by relatives, Austrian law stipulates the succession by spouses. The
prerequisite for a succession by a spouse is marriage upon accrual of the inheritance. Spouses are always
mutual (co-)heirs at law, despite having renounced the inheritance.
2.2
Testamentary succession
A testator may control his succession by making a will or a contract of inheritance. Any person having
unlimited legal competence may make a will. Every person who is of sound mind, memory and
understanding and who has completed the age of 18 may validly dispose of the whole or any part of the
disposable portion of his or her estate by setting up a will. Persons between the age of 14 and 18 may do so
only orally before a competent court. Strict adherence to the formalities is mandatory and must be complied
with rigidly, otherwise, the will is null and void.
2.3
Types of testamentary dispositions
2.3.1 Last will
A last will constitutes a unilateral universal disposition of the testator mortis causa. It is a legal document
that regulates an individual’s estate after death. According to clause 533 ABGB a last will is only called a
“Testament” when at least one heir is nominated.
Austrian law provides different ways of setting up a will. All types of last will can be revoked or replaced by a
new will at any time. Last wills may be written by hand or typed. If the document is handwritten and signed,
witnesses are not necessary. In other cases, three witnesses are needed to fulfil the mandatory formalities of
a written will. For oral wills, which are only possible in certain circumstances, special concerning witnesses
apply.
Possible forms of last wills:
• holograph wills (entire text is written and signed by hand);
• witnessed wills (private wills – executed in the presence of three witnesses);
• regular oral wills (since 2004);
• emergency wills;
• judicial and notarial wills.
The law reform does not allow new forms. Last wills in form of a video or an audio file will still not apply with
the law and remain invalid.
27
Nevertheless, the law reform induces some modifications in detail. If the last will is not written by hand, the
testator will need to sign the document in front of three simultaneously present witnesses and will have to
add the confirmation that this is his/her last will. Such wording as “my will”, “I want that”, “that’s how it should
be” would be appropriate.
The last will may include several types of forms and orders. One order of a “Testament” is the appointment
of heirs. The testator may also incorporate legacies, provisions for the execution of the will and orders for the
division of the estate.
In Austria, it is possible but not mandatory to deposit the last will at court or at a notary public or an attorneyat-law. Furthermore, there is a special “Register of Wills”. The registration minimises the risk of suppression
or fraudulent alteration.
Testamentary contracts can only be concluded between spouses. Testamentary contracts have to be in the
form of a notarial act. In contrast to a “last will”, the testamentary contract is a bilateral legal transaction that
can only be amended by agreement between the parties.
2.3.3Codicil
A codicil is a unilateral testamentary disposition that may be cancelled at any time, which contains no
appointment of an heir. Dispositions could be i.e. the testamentary appointment of a legal guardian or a
legacy.
As long as there is no legal exception, the same requirements are applicable for codicils and for last wills.
2.3.4 Legacy
The legatee does not become a universal successor. However, if a testator wants to provide a person with
an advantage without appointing him/her as an heir, he/she can set up a legacy. The heirs are obliged to
transfer the legacy object to the legatee. The legacy can be ordered in a will, a testamentary contract or in a
codicil. Every asset may form the object of the legacy.
In turn, legatees are only entitled to gain certain assets of the inheritance, being singular successors.
2.3.5Conditions
If a testator wants to provide somebody with a special asset but does not want to entitle the person to a
claim (like a legatee), he may place a testamentary burden on the heir. The burden does not entitle to a legal
claim of the beneficiary. The executors may then demand and enforce the adherence in legal proceedings.
2.4
Right to a statutory share
The Austrian law restricts the testator’s free will to choose his/her heirs. Close living relatives and spouses
must receive at least a special percentage of the testator’s net estate (“statutory portion”).
2.5
Family foundation
Family foundations do not contribute to improve common welfare but serve private and economic purposes.
A family foundation can be compared with a company. Furthermore, family foundations can offer tax
advantages for the owner of the foundation and the family as well.
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A family foundation has neither members nor shareholders (in a narrower sense) but consists of assets. The
deed of foundation determines the purpose of the separated estate and the structure of the executive body.
The legal form of a family foundation has legal capacity and is managed by the executive body, for example
by an executive board, and is supervised by a board of trustees. Moreover, the founder defines the category
of beneficiaries, i.e. persons who shall receive the planned dividend payment. All assets of the separated
estate must be preserved and must not be divided whilst the foundation subsists.
2.6
Execution of the will
The testator can appoint an executor (clause 816 ABGB). This special executor has to fulfill the testator’s last
will. Attention should be paid to the fact that the heir is entitled to revoke this appointment. The executor may
simultaneously act as an administrator of estate (“Nachlassverwalter”), if he is appointed by court.
3.
Transnational aspects
3.1
Law on succession
According to Austrian law, succession procedures must be conducted in compliance with the laws of the
testator’s citizenship country. If the testator’s habitual residence was in Austria, Austrian courts would be
competent. However, the foreign substantive law would usually be applicable for succession procedures, if
a person had his/her habitual residence in Austria but still a foreign nationality. Austria as place of jurisdiction
applies to all movable and immovable assets located in the country. Matters related to movable assets
located abroad are reviewed only upon special request in such succession procedures. Austrian jurisdiction
does not apply to immovable property located abroad.
If the testator did not have a permanent residence in Austria but had immovable property in the country,
the succession procedure would only deal with the immovable property in Austria. Matters in relation to
a foreign person’s movable assets that are located in Austria, are held in separate transfer proceedings
(“Ausfolgungsverfahren”).
3.1.1 Choice of the applicable law
The choice of applicable law in Austrian citizens’ wills is an important novelty. A last will is normally executed
in accordance with the Austrian substantive succession law. If the testator moved abroad and died in another
EU-member state, the substantive succession law of this country would be applicable. It is likely that some
provisions of his last will would not be in accordance with the laws of the respective country.
For this reason, a special clause should be included in the last will’s text, so that all matters related to the
succession shall be reviewed applying Austrian succession law, regardless of the habitual residence country
at the time of death.
If the testator moves to a country located outside of the EU, then the applicable conflict-of-laws may prohibit
choosing the law of Austria.
The revision of existing last wills in regard to the choice of the applicable law may not be necessary because
art. 83, para. 4 of the Regulation enables (“ex post facto”) the choice of fictitious law in wills made before
August 17, 2015. For this reason, the choice of applicable law is binding, even if the Regulation did not inure
at time of making the will. It is advisable that any new last will that is set up incorporates an adequate choice
of law clause.
29
It is also possible to choose the applicable law by intentionally changing the habitual residence. If so, then the
testator should specify that clearly in his/her will in order to avoid legal uncertainty.
In practice, problems may arise in relation to cases when testators, not being fully aware of succession law,
set up their wills on their own without choosing the applicable law and move to another country later on or if
a testator revokes all former dispositions.
3.1.2 Validity of wills
The Regulation supplements the 1961 Hague Form of Wills Convention and therefore requires a special
verification for validity of wills by form. According to the Regulation the special verification must also be
abided, even if the last will was set up before the Regulation came into force.
Art. 27 of the Regulation includes a wide list of different circumstances that ensure the validity of wills in
accordance with the favor testamenti principle.
3.1.3 International private law, Austrian jurisdiction
The most important changes are related to the replacement of citizenship as the criterion for determining
jurisdiction with the habitual residence. In the future, Austrian substantial succession law is also applicable
for succession proceedings concerning EU foreigners in Austrian courts unless the choice of law has been
made in favour of the country of citizenship. This actually applies to the citizens of non-EU countries as well.
The above-mentioned provisions on jurisdiction lead to the fact that from now on, Austrian jurisdiction will not
be applicable for Austrian citizens, if the testator’s habitual residence is abroad at the time of death.
3.1.4 Changes in the Registration Procedure in the Land Register and Commercial Register
All rights concerning real estate are registered in the Austrian Land Register. The registration is based
on a document signed by the parties or issued by Austrian authorities. In the field of succession law this
document is a court decision on the transfer of the succession (for heirs) or official certificates of title (for
legatees).
The Regulation states that generally, European Certificates of Succession must be recognised as valid
documents for official registrations concerning properties. The Regulation also fortifies the “lex rei sitae
principle” regarding immovable property. Tension only exists between succession law and rights in rem.
Nevertheless, in some cases it could become difficult to make entries in the land or commercial register
on the basis of succession certificates issued abroad, if additional documents are necessary according to
Austrian law.
3.2
New EU Regulation on succession
See general description as outlined on page 4 which also applies to Austria.
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Belgium
A.
Tax law
1.
Taxable persons/taxable base/type of taxes
Transfer of property, whether movable or immovable assets, is either subject to inheritance tax or gift tax.
Inheritance tax is levied after the death of the testator that was a Belgian resident. Gift tax will apply for the
donation of movable or immovable goods during the lifetime of the donor.
In principle, the beneficiary is liable for the inheritance tax, whatever the status of the beneficiary may be
(i.e. resident or not). The base for the calculation of the inheritance tax is the worldwide net property value
of all movable and immovable assets, situated in Belgium and abroad, less the amount of debt that may be
deducted. The net property value is the fair market value, however, for certain property a different valuation
may be applied. In principle, the fair market value is also the calculation bases for gift tax. Transfer tax is due
on the transfer of Belgian immovable property, if the deceased person is a non-resident for tax purposes at
the time of death.
2.
Particularities in Belgium
Politically Belgium is composed of three partly independent regions:
• Brussels capital region;
• Flemish region;
• Walloon region.
Each region is given a certain autonomy for well defined matters. One of these matters is that each region
can apply its own rules, rates and regulations for the inheritance tax and gift tax. Therefore, different rules,
rates and regulations will apply depending on in which region of Belgium the testator/the donor is resident
and/or the assets are located.
3.Rates
3.1
Inheritance/succession tax
Inheritance/succession tax rates vary, depending on the region, the relationship with the deceased and the
base of the beneficiary’s share.
31
Brussels capital region
For spouse, legal cohabitant and direct ascendant or descendant of the deceased
Taxable amount in EUR
Tax rate (%)
Inheritance tax due on the previous
amount(s) in EUR
0.01-50,000
3
0
50,000.01-100,000
8
1,500
100,000.01-175,000
9
5,500
175,000.01-250,000
18
12,250
250,000.01-500,000
24
25,750
above 500,000
30
85,750
Tax rate (%)
amount(s) in EUR
0.01-12,500
20
0
12,500.01-25,000
25
2,500
25,000.01-50,000
30
5,625
50,000.01-100,000
40
13,125
100,000.01-175,000
55
33,125
175,000.01-250,000
60
74,375
above 250,000
65
119,375
Tax rate (%)
amount(s) in EUR
0.01-12,500
35
0
12,500.01-25,000
35
4,375
25,000.01-50,000
35
8,750
50,000.01-100,000
50
17,500
100,000.01-175,000
60
42,500
175,000.01-250,000
70
87,500
above 250,000
70
140,000
For brothers and sisters of the deceased
For uncles, aunts, nieces or nephews
32
Any other persons
Tax rate (%)
amount(s) in EUR
0.01-50,000
40
0
50,000.01-75,000
55
20,000
75,000.01-175,000
65
33,750
above 175,000
80
98,750
Flemish region
0.01-50,000
Tax rate (%)
amount(s) in EUR
3
0
9
1,500
27
19,500
Tax rate (%)
amount(s) in EUR
0.01-75,000
30
0
75,000.01-125,000
55
22,500
above 125,000
65
50,000
Tax rate (%)
amount(s) in EUR
0.01-75,000
45
0
75,000.01-125,000
55
33,750
above 125,000
65
61,250
50,000.01-250,000
above 250,000
Any other persons
33
Walloon region
Tax rate (%)
amount(s) in EUR
0.01-12.500
3
0
12,500.01-25,000
4
375
25,000.01-50,000
5
875
50,000.01-100,000
7
2,125
100,000.01-150,000
10
5,625
150,000.01-200,000
14
10,625
200,000.01-250,000
18
17,625
250,000.01-500,000
24
26,625
above 500,000
30
86,625
Tax rate (%)
amount(s) in EUR
0.01-12,500
20
0
12,500.01-25,000
25
2,500
25,000.01-75,000
35
5,625
75,000.01-175,000
50
23,125
above 175,000
65
73,125
Tax rate (%)
amount(s) in EUR
0.01-12,500
25
0
12,500.01-25,000
30
3,125
25,000.01-75,000
40
6,875
75,000.01-175,000
55
26,875
above 175,000
70
81,875
For uncles, aunts, nieces or nephews
34
Any other persons
Tax rate (%)
amount(s) in EUR
0.01-12,500
30
0
12,500.01-25,000
35
3,750
25,000.01-75,000
60
8,125
75,000.01-175,000
80
38,125
above 175,000
80
118,125
3.2
Gift taxes
On gift taxes many “special” rules and regulations apply. Indeed, differences exist within the different regions,
depending on whether the gift is a movable or immovable asset, on the relationship between the donor and
the beneficiary, on the value of the gifted property, and more important on the fact whether the gift is based
on a written document or quoted as a gift from “hand to hand”.
Registration of a gift is only required for donations made through a Belgian notary deed. Registration is also
required for donation of immovable property.
Donations of immovable property located outside Belgium, and/or donations of any movable property are not
subject to registration and as a consequence not subject to gift tax.
The donor or the beneficiary may voluntarily register these donations. The standard rates will then be
calculated. This is a free choice made by the donor/beneficiary. Reason to do so may well be the fact that for
donations of movable property and/or immovable property located outside Belgium, inheritance tax will still
have to be paid in the case the donor dies within three years from the date of the gift, and the donor is still a
Belgian resident at the time of his/her death
3.2.1 Brussels capital region
Immovable property
The gift tax rates for immovable property within the Brussels capital region are identical to the inheritance tax
rates that apply within this region. However, the donation of a part of the family dwelling to a spouse, a legal
cohabitant or a direct descendant or ascendant is subject to more favourable progressive tax rates.
Tax rate (%)
Gift tax due on the previous
amount(s) in EUR
2
0
5,3
1,000
100,000.01-175,000
6
3,650
175,000.01-250,000
12
8,150
250,000.01-500,000
24
17,150
above 500,000
30
77,150
0.01-50,000
50,000.01-100,000
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Movable property
Movable property is subject to a fixed tax rate. This tax rate amounts to 3% for donations made to a spouse,
a legal cohabitant or a direct ascendant or descendant. Donations to all other people are subject to a fixed
tax rate of 7%.
3.2.2 Flemish region
Immovable property
For spouse, cohabitant and direct ascendant or descendant
Tax rate (%)
3
10 (9)
150,000.01-250,000
9 (6)
20 (17)
250,000.01-450,000
18 (12)
30 (24)
above 450,000
27 (18)
40 (31)
0.01-150,000
These rates apply as of July 1, 2015. The amounts between brackets refer to immovable property that was
subject of energy renovation.
Movable property
Movable property is subject to a fixed tax rate. This tax rate amounts to 3% for donations to a spouse, a
cohabitant or a direct ascendant or descendant. Donations to all other people are subject to a fixed tax rate
of 7%.
3.2.3 Walloon region
Immovable property
The gift tax rates for immovable property within the Walloon region are identical to the succession tax rates
that apply within this region. However, the donation of a part of the family dwelling to a spouse, a legal
cohabitant or a direct descendant or ascendant is subject to more favourable progressive tax rates.
Tax rate (%)
Gift tax due on the previous
amount(s) in EUR
0.01-25,000
1
0
25,000.01-50,000
2
250
50,000.01-175,000
5
750
175,000.01-250,000
12
7,000
250,000.01-500,000
24
16,000
above 500,000
30
76,000
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Movable property
Most donations of movable property are subject to a flat tax rate when certain conditions are met. This flat tax
rate amounts to 3% for donations to a spouse, a legal cohabitant, or a direct ascendant or descendant: 5% for
donations to brothers, sisters, uncles, aunts, nieces or nephews and 7% for donations to any other person.
Other important remark
The donation of a part of the family dwelling to the spouse, a legal cohabitant or qualifying factually
cohabiting person may be subject to more favorable rules and rates as well as with regard to gift taxes as to
inheritance taxes.
4.Exemptions/allowances/reliefs
For each region specific rules apply on personal allowances. These are mainly composed of:
• a fixed exempted amount;
• increased for children under the age of 21;
• increased for a surviving spouse (partner) with children under the age of 21;
• exemption (whole or partly) for the family dwelling.
Each of these components gets a different treatment in each of the regions (i.e. Brussels, Flemish, Walloon).
For the Flemish region, the inheritance is split into an immovable and movable part, being taxed separately,
which results in reducing the progressivity. The transfer of family owned businesses and companies is subject
to particular legislation. Depending on certain conditions which differ from region to region, the succession of
these family-owned businesses may be fully exempted from inheritance tax or may claim reduced rates. Any
foreign inheritance tax levied on foreign immovable property may be deducted from Belgian inheritance tax
due on the same property without exceeding the tax that might have been due in Belgium if the property was
located in Belgium. Only Sweden and France have concluded a treaty with Belgium to avoid double taxation
(on inheritance tax, not on gift tax).
5.Trusts
Belgian law does not know the concept of a trust, although foreign trusts are recognised in the Belgian
international private law code.
The forced heirship rules could limit the extent of the estate that a person could transfer to a trustee. If the
trust is set up by will, the trustee must ask for a court order to have the protected heirs hand over the assets
to him. The courts have the right to limit this claim.
If the individual had set up the trust in a trust deed before death, the protected heirs can ask the court to
decide whether the amount of the assets transferred to the trustee breaches the forced heirship rules. If the
deceased has given away during his lifetime more than is allowed under the rules, the court can order that
part of the trust assets be returned to the estate.
However, in practice, the Belgian courts would only limit the effect of the trust if the protected heirs invoke
the forced heirship rules.
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B.
Civil law
1.
If there is no will
If a person dies without leaving a will, the Belgian inheritance rules decide who inherits the estate. In principle,
the transfer is automatic, and the heirs do not need a court order to possess their inheritance. Belgian
inheritance law recognises heirs on the basis of different groups of people, ranked in descending order. The
next group only inherits if there is nobody left in the previous group. All heirs in the same group inherit equal
shares. The groups are:
1. the children and grandchildren;
2. the parents and their relatives;
3. the brothers and sisters and their relatives;
4. if there are none of these, the Belgian State.
A surviving spouse is an heir as well, but the extent of his/her inheritance rights depends on the situation:
• If the deceased has one or more children, the spouse is entitled to an usufruct in the estate.
• If there are no children but there are other legally recognised heirs, the surviving spouse is entitled to
the entire community property, as well as to an usufruct in the private property of the deceased (for the
distinction see below).
• If there are no other heirs at all (i.e. no children, grandchildren, parents, brothers and sisters, nieces or
nephews) the spouse will inherit the entire estate.
The “usufruct” is the right to hold the assets of the estate and to collect and use the dividends, interests,
rent, etc. It is comparable to a life interest. It does not give a right to sell the assets of the estate. Both the
heirs and the spouse have the right to ask that the life interest is converted into full ownership of some of the
assets, but the spouse may refuse this conversion in respect of the house.
“Community property” is a typical continental form of matrimonial property. By default everything a Belgian
couple acquires after the marriage is owned by both. The possessions they had before their marriage as well
as anything they inherit from their family remain their own private property. They can change these rules by
signing a marriage contract before a notary so that they either own everything separately or everything as
community property.
When one spouse dies, half of everything owned in community property remains the property of the surviving
spouse and is not part of the deceased person’s estate. The other half of community property falls in the
estate.
Other legal systems do not have the concept of community property. In international situations couples
have to find out which country’s law governs the ownership situation between husband and wife. Generally
speaking, the Belgian solution is to look at the law of the country where they had their first residence or
domicile as a married couple. Until 2004, Belgium looked at the joint national law of a couple from the same
country.
38
2.
If there is a will
Belgian law has a system of “forced heirship” that protects certain heirs so that they cannot be excluded
from inheriting part of a person’s estate. These set aside a part of the estate defined by law (“reserve”) for
protected heirs, even if the person makes a will. Protected heirs are certain family members and the spouse.
Therefore, before a will is executed the following rules are put into effect:
• If there is one child, he/she inherits at least half of the deceased’s assets; two thirds are reserved if there
are two children; three quarters are reserved if there are three or more children.
• The surviving spouse has an usufruct in one half of the assets of the deceased, in particular in the family
home.
• If there are no children, the parents or grandparents are entitled to one quarter of the assets for the
mother’s side and one quarter for the father’s side.
A will may only dispose of the assets that remain after these rules are applied. If there are no protected heirs
then a will may dispose of all of a person’s property.
If a will leaves more to certain beneficiaries than is allowed under the heirship rules, the protected heirs can
have the legacy reduced to the part of the estate the testator could dispose of without infringing their reserve.
A protected heir can also ask the court to oblige beneficiaries of lifetime donations to return the part of the
donation that has infringed their reserved right.
Heirs can accept or reject an inheritance.
3.
See general description as outlined on page 4 which also applies to Belgium.
4.Miscellaneous
Optimisation is accepted under Belgian (case)law. Estate planning through donations (see before) through
the creation of a civil partnership etc. is allowed for as far as the abuse of tax law is not involved. The tax
administration has published and decided on certain transactions that have not been quoted as abuse:
• hand to hand gifts/donations made by transfer between bank accounts;
• successive donations of immovable property;
• donations before a foreign notary;
• donations with retention of usufruct.
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Canada
A.
Tax law
1.
There is no estate or gift tax in Canada. The federal estate and gift tax legislation was repealed effective
December 31, 1971, with the introduction of the taxation of capital gains, effective January 1, 1972.
1.1. Taxable event
Under the Canadian Income Tax Act (“ITA”) a deemed disposition and a deemed acquisition of property
arises upon the death of an individual owning property or upon the transfer of property by an individual by
way of a gift inter vivos.
1.2. Taxable person and taxable assets
The income tax liability in Canada arising from the death of an individual or from the gift of property by an
individual depends on the residency of the individual, the type of property owned at the time of death or to
be gifted and the relationship of the beneficiaries of the individual’s estate or recipient of the gifted property to
the individual.
1.2.1 Unlimited (personal) tax liability
Residents of Canada must pay tax on worldwide income earned. Some of the considerations in determining
whether or not an individual is a resident of Canada are:
• the amount of time spent in Canada;
• the motives or reasons for being present in or absent from Canada during the year;
• the maintenance of a dwelling in Canada;
• the origin and background of the individual;
• the individual’s general mode or routine of life;
• ownership of property, memberships in clubs and presence of relatives, including a dependent spouse
and children, in Canada.
A person may be a resident of more than one country during the same period of time. Where an individual is
considered to be resident of Canada and also a resident of a double tax treaty (“DTA”) country, the applicable
treaty will normally determine the country of residence under the “tiebreaker” rules.
Under the ITA, an individual is deemed to be a resident of Canada throughout a particular year if he or she
spends 183 or more days in Canada in that particular year.
A deemed disposition of worldwide assets, including capital property, owned by a Canadian resident at the
time of death is considered to have occurred. The deceased individual is considered to have disposed of
each property for proceeds equal to the fair market value (“FMV”) of the property immediately prior to death.
40
This usually results in a gain or loss having to be included in computing taxable income of the individual for
the year of death. A capital gain is 50% taxable (“taxable capital gain”) and a capital loss is 50% deductible
(“allowable capital loss”) against taxable capital gains. The FMV of any registered retirement savings plan
(“RRSP”) or registered retirement income fund (“RRIF”) is fully taxable in the year of death unless it is
bequeathed to the individual’s spouse or dependent minor child.
A disposition at FMV will arise when property is gifted to any person, trust, foundation or charity. Property
gifted to the following is considered to have been disposed of for proceeds equal to its tax cost resulting in
no gain or loss:
• to a spouse or qualified spouse trust (see 1.6.2. below for extended definition of a “spouse” and
treatment of such gifts under the ITA);
• if more than 65 years old, to a special trust for the benefit of themselves ( “alter ego trust”) or themselves
and their spouse (“joint partner trust”).
1.2.2 Non-residents of Canada – limited tax liability in the case of domestic assets
Non-residents of Canada will be liable to pay tax in Canada at the time of death on the deemed disposition at
FMV of taxable Canadian property (“TCP”).
Non-residents of Canada will also be subject to the deemed disposition at FMV rule on gifts of TCP.
Generally, TCP includes a direct and indirect interest in Canadian real estate, Canadian resource property or
timber resource property (“the specified assets”), shares of any corporation or an interest in a partnership,
even if it is non-resident, if more than 50% of the FMV of the shares or partnership interest was derived
directly or indirectly from specified assets at any time during the prior 60 months.
The taxation of any income arising from the deemed disposition of TCP, including taxable capital gains, in
Canada is subject to any exemption under a tax treaty between Canada and the country of residence of the
non-resident.
The ITA establishes procedures for collecting tax from non-residents on the disposition of TCP. Noncompliance results in the purchaser of the TCP being liable for the tax. These rules do not apply to a deemed
disposition on death.
1.3
Maturity of taxes
Income taxes payable per the decedent’s terminal return are due by the later of April 30 of the year following
the year of death or 6 months after the date of death (“the balance due date”). However, where the decedent
is deemed to have disposed of property, the deceased’s representative can elect to defer payment on all or a
portion of the income tax arising on such deemed disposition or on rights or things required to be included in
income over a maximum period of 10 years. The deferred tax is payable in equal annual instalments together
with accrued interest at the prescribed rate plus 4% provided security acceptable for payment is posted with
the Canada Revenue Agency (“CRA”).
For gifts made in the year, any income taxes arising from the deemed disposition for proceeds equaling FMV
are due by April 30 of the subsequent year.
The same rules apply to a non-resident of Canada owning TCP.
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1.4
Tax cost of acquisition
The estate of an individual or the beneficiaries of an estate, as the case may be, will acquire property at a
cost equal to the deceased’s proceeds which is generally the FMV of the property immediately prior to death
or the tax cost of the property to the deceased for transfers to a spouse.
With respect to gifts of property, the recipient of the property will be deemed to acquire the property at a cost
equal to the deemed proceeds to the transferor.
1.5
Rules of valuation
The determination of FMV is incumbent upon the deceased taxpayer’s personal representative. Such FMV
may be subject to challenge by CRA. CRA defines FMV as “the highest price, expressed in terms of money
or money’s worth, obtainable in an open market between knowledgeable, informed and prudent parties
acting at arm’s length, neither party being under any compulsion to transact”. Real estate values should be
supported by appraisals. The value of shares of private corporations should be completed by a Chartered
Business Valuator.
1.6
Tax exemptions
1.6.1 Principal residence
If property qualifies as a taxpayer’s principal residence, he or she can use the principal residence exemption
to reduce or eliminate any capital gain realised on the deemed disposition of the property. The types of
property that qualify as a principal residence include: a house, apartment, duplex, condominium, cottage,
mobile home, trailer, house boat. Other criteria that must be met to claim the exemption include:
• the property must be owned by the taxpayer in the year for which it is designated as a principal
residence;
• the property, including a recreational property, must be ordinarily inhabited in the designated year by the
taxpayer, the taxpayer’s current or former spouse or common-law partner, or by the taxpayer’s child;
• only one property can be designated by the taxpayer or the taxpayer’s spouse as a principal residence for
any particular year;
• the land on which a housing unit is situated, and any portion of the adjoining land contributing to the use
and enjoyment of the property can qualify as part of a principal residence.
1.6.2 Transfers to a spouse or testamentary spousal trust
The payment of tax resulting from the deemed disposition at death can be deferred if the property is
transferred to a Canadian resident spouse of the deceased or to a qualifying testamentary spousal trust
(referred to as a “rollover”). A spouse includes a common law partner of the same or opposite sex. The
spouse or spouse trust, as the case may be, acquires the property at the deceased’s tax cost, and any gain
is deferred until the property is disposed by the spouse or spouse trust or until the demise of the surviving
spouse. Any income from the property or any gain upon its ultimate disposition will be taxed in the hands of
the surviving spouse or testamentary spousal trust.
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For a trust to be a qualifying testamentary spousal trust and to allow for the deferral of the deceased’s capital
gains tax, all of the following criteria must be met:
• the deceased transferor must be a resident of Canada at the time of death;
• the trust must be a resident of Canada when the property vests in the trust;
• the trust must be created under the deceased’s will, and
• the terms of the trust must stipulate that no one other than the spouse is entitled to receive either the
income or capital of the trust while the spouse beneficiary is alive.
Under the ITA, there is a deemed disposition of all property held by the testamentary spousal trust for
proceeds equal to the FMV of such property immediately prior to the death of the spouse beneficiary. The
income, including taxable capital gains, arising from the deemed disposition, is included as income of the
testamentary spousal trust subject to income tax. Effective January 1, 2016 such income, including taxable
capital gains, must be reported on the final personal income tax return of the surviving spouse beneficiary
(“the terminal return”).
Any assets remaining in the testamentary spousal trust on the demise of the surviving spouse are transferred
to the ultimate beneficiaries as stipulated in the will of the deceased transferor.
The advantage of establishing a testamentary spousal trust is that the deceased transferor can provide
income and capital for the surviving spouse during his or her lifetime while ensuring that specific beneficiaries
become the ultimate owners of the assets.
1.6.3 Capital gains exemption
Where a deceased taxpayer owns shares of a qualifying small business corporation (“QSBC”) or qualified
farm or fishing property, capital gains tax may be reduced if the deceased’s lifetime capital gains exemption
can be claimed on the terminal return to offset the capital gain arising on the deemed disposition of the
property. Such lifetime exemption with respect to shares of a QSBC is CAD 813,600 (2015), indexed for
inflation, and is CAD 1,000,000 for qualified farm or fishing property. The ability to claim the exemption will
depend on whether all or a portion of this exemption remains unclaimed at death and whether the shares of
the QSBC and farm or fishing property qualify for the exemption. To be a QSBC the corporation must be a
Canadian-controlled private corporation that meets certain tests with respect to the use of its assets and the
deceased shareholder has to meet a 2 year holding period test with respect to the ownership of the shares
prior to death.
Where qualified property is bequeathed to a surviving spouse, the representative of the deceased may
choose to elect out of the automatic rollover of specific property to the surviving spouse at the deceased’s
tax cost to report all or a portion of a capital gain that can be sheltered by way of offset against the
deceased’s available capital gains exemption.
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1.6.4 Utilising capital losses
Generally, net capital losses (allowable capital losses less taxable capital gains) realised in the year can be
carried back 3 years or carried forward indefinitely to be offset against taxable capital gains realised in those
years. Net capital losses incurred in the year of death or carried forward from prior years to the year of death,
subject to certain limitations, can be deducted against income from any source for the year of death or the
preceding year.
1.6.5 Recapture and terminal losses
The deemed disposition of property for proceeds equaling the FMV of depreciable property on the death of
the testator may give rise to a capital gain, to a recapture of depreciation previously claimed, or to a terminal
loss, to be reported on the terminal return.
1.6.6 Farm or fishing property transferred to children or grandchildren
If the property to be transferred under the will is farm or fishing property, an interest in a farm or fishing
partnership or shares in a farm or fishing corporation, there can be a complete deferral of the tax otherwise
payable if the property is being transferred to the children or grandchildren of the deceased who are
residents of Canada immediately prior to death providing certain conditions relating to the use of the property
are met. The personal representative of the deceased can elect to transfer the property at any amount
between cost and FMV. Consequently, the elected amount can be set to trigger a capital gain to utilise the
deceased’s remaining capital gains exemption so that the recipient child or grandchild has a higher tax cost
when the child or grandchild ultimately disposes of the property in the future.
Similar rules apply if the property is being transferred by an individual to children or grandchildren during the
individual’s lifetime.
1.7
Tax returns to be filed
1.7.1 General comments
Canadian personal income tax returns are required to be filed and related income taxes payable are
determined, on a calendar year basis. The deceased’s personal representative is responsible for filing the
deceased’s tax returns and for paying the related income taxes, including for any prior years.
The terminal return for the year of death is due on April 30 of the subsequent year, or June 15 of the
subsequent year if the deceased had business income. If the death occurs between November 1 and
December 31, the deceased’s terminal return is not due until the later of the normal filing date or 6 months
after the date of death.
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1.7.2 Separate returns for the year of death
The personal representative should determine if it is beneficial to file separate elective tax returns for the year
of death in order to reduce the income taxes otherwise payable.
The personal representative may elect on a timely basis to include income attributable to certain “rights
or things” of the deceased at the time of death on a separate tax return. “Rights or things” are amounts
of income that were not paid at the time of death that would otherwise have been included in the
deceased’s income for the year in which they were paid such as dividends declared but not yet paid, unpaid
compensation, and matured but unclipped bond coupons.
Alternatively, income attributable to the deceased’s rights or things can be transferred to one or more
beneficiaries to be reported on their income tax returns.
If the deceased is an income beneficiary of a testamentary trust, the personal representative may elect to file
a separate tax return for the income earned from the trust for the period commencing immediately after the
end of the trust’s fiscal year and ending at the time date of death.
The advantage of filing elective returns is the ability to tax the income reported on each return at the
progressive marginal tax rates. In addition, some personal tax credits can be claimed on both the terminal
and the elective returns, resulting in a reduction to the deceased’s overall income tax liability.
1.8
Winding up the deceased’s estate
A period of time may elapse between the date of death and the date of the legal transfer of the deceased’s
assets to the ultimate beneficiaries. During this interim period, the deceased’s assets form the “estate” that
is a testamentary trust under the ITA with the deceased’s personal representative retaining control of those
assets. The assets held in this trust may earn income prior to distribution to the beneficiaries or the assets
may be sold resulting in a capital gain or capital loss with the residual cash being distributed to beneficiaries.
Such income, including taxable capital gains, is reported on a T3 Trust Income Tax and Information Return
and is taxed at the graduated income tax rates for individuals. Effective January 1, 2016, only the estate of
an individual designated as a “graduated rate estate” under the ITA will qualify for the graduated tax rates for
a maximum period of 36 months following the death of the individual. After 36 months, income earned by
such trust is taxed at the top marginal tax rate applicable to an individual resident in the province of residence
of the trust. Transitional rules will apply for a “graduated rate estate” that commenced prior to January 1,
2016.
Net capital losses realised within the first taxation year of the estate (“graduated rate estate” after January
1, 2016) can be carried back to the deceased’s terminal return to offset taxable capital gains as reported
therein, including taxable capital gains arising from the deemed disposition.
Prior to distributing any estate assets to the beneficiaries, the personal representative of the deceased should
apply for and receive a clearance certificate from CRA. This protects the personal representative from being
liable to pay income taxes otherwise payable by the estate to the extent the estate does not have sufficient
funds to do so.
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1.9
Tax rates
Canadian income tax contemplates a progressive system which taxes personal income at graduated rates
that vary depending on the province of residency. The maximum combined 2015 federal and provincial
personal income tax rates based on the legislation as enacted on October 1, 2015 are as follows:1
Jurisdiction
(a)
Ordinary
income (%)
Capital
gains (%)
Eligible
dividends (%)
Ineligible
dividends (%)
Alberta
1
40.25
20.13
21.02
30.84
British Columbia
2
45.80
22.90
28.68
37.98
Manitoba
8
46.40
23.20
32.26
40.77
New Brunswick
3
54.75
27.38
38.27
46.89
Newfoundland and Labrador
4
43.30
21.65
31.57
33.26
North West Territories
8
43.05
21.53
22.81
30.72
Nova Scotia
5
50.00
25.00
36.06
41.87
Nunavut
8
40.50
20.25
27.56
31.19
Ontario
6
49.53
24.77
33.82
40.13
Prince Edward Island
8
47.37
23.69
28.70
38.74
Quebec
8
49.97
24.99
35.22
39.78
Saskatchewan
8
44.00
22.00
24.81
34.91
Yukon
7
44.00
22.00
19.29
35.18
Income in excess of:
1
CAD 300,000
5
CAD 150,000
2
CAD 151,050
6
CAD 220,000
3
CAD 250,000
7
CAD 500,000
4
CAD 175,000
8
CAD 138,587
1.10Setting-off/exemption
See comments under paragraph 3 below.
1An increase of 4% to the federal income tax rate applicable to income in excess of CAD 200,000 has been
proposed that may be effective January 1, 2016.
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2.
Wealth tax
Canada does not have a wealth tax.
3.
Canada does not have any DTAs dealing only with the taxation of estates. However, many of its DTAs contain
provisions that will have an impact on estate planning.
A capital gain arising from the deemed sale of TCP upon the death of an individual or a gift by a non-resident
may be exempt from taxation in Canada under the tax treaty between Canada and the country of residence
of the individual. All of Canada’s tax treaties permit Canada to tax gains derived from the alienation of a direct
interest in Canadian real property or “immovable property”. There is considerable variation among Canada’s
tax treaties in terms of Canada’s ability to tax gains derived from the deemed sale of certain indirect interests
in Canadian real property, i.e. generally, interests in corporations, partnership or trusts that derive more than
50% of the total FMV of such entity from Canadian real property.
The Canadian tax rules for residents of Canada concerning a deemed disposition on death or by way of a
gift do not distinguish between Canadian and foreign assets. Taxes may also arise in the foreign jurisdiction
where the foreign assets are located. If the resulting taxes are in the nature of income taxes under the
ITA and generally pursuant to the tax treaty, a foreign tax credit can be claimed. However, if foreign taxes
assessed are in the nature of estate taxes, including inheritance taxes, then no foreign tax credit relief will
be given. An exception is with respect to US estate tax where the terms of the Canada-US tax treaty have
unique provisions allowing for US estate tax to be claimed as a foreign tax credit for Canadian tax purposes.
4.
4.1.Expatriate
Under the ITA, there is a deemed disposition of world-wide assets owned by an individual at the time he or
she ceases to be a resident of Canada. The assets are considered to have been disposed of for proceeds
equal to their FMV immediately prior to departure with any resulting income, including taxable capital gains,
being subject to tax for the year of departure. The individual is considered to have reacquired the assets at
cost equal to the FMV proceeds. Certain assets are excluded from the FMV disposition rule including real or
immovable property, a Canadian resource property or a timber resource property situated in Canada. Shares
of all private corporations are subject to this deemed disposition rule even if the private corporation owns
excluded property.
An expatriate continues to be subject to the rules outlined above as it relates to non-residents of Canada
who own TCP at the time of their demise or who gift TCP during lifetime. If the specific TCP was owned at
the time of departure from Canada, the tax cost utilised in determining the amount of income or gain arising
upon death or upon the gift of such property in Canada is the FMV of such property at the time of departure
from Canada.
Complex rules under the ITA allow for the deferral of income tax otherwise payable with respect to the
deemed disposition of assets upon departure from Canada providing adequate security is provided to the
taxation authorities. Payment of the tax is deferred until April 30 of the year following the year of sale, gift or
death subject to any prepayment of tax that may be required at the time of sale or gift.
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4.2. Income tax consequences relating to the ownership of shares of a
corporation following emigration
As noted under paragraph 4.1 above, an expatriate will be subject to capital gains tax upon his or her
departure from Canada as a result of the FMV deemed disposition of shares of any corporation held at that
time.
If the shares constitute TCP, the expatriate will continue to be subject to capital gains taxation in Canada
upon death, upon a future sale or by way of a gift inter vivos, subject to treaty exemption.
Relief is provided under the ITA with respect to shares of a Canadian corporation that are TCP to ensure that
all or a portion of any withholding tax relating to dividends paid by the Canadian corporation to the expatriate
are credited against the departure tax payable if a capital loss is incurred on the ultimate sale or deemed sale
of the shares. Complex rules also allow for a reduction in the related departure tax to the extent a capital
loss, reduced by post-departure dividends received, arises on the subsequent disposition of the shares. This
loss can be applied against the original gain reported on the expatriate’s personal income tax return for the
year of departure. No relief is provided with respect to shares of corporations that are not TCP.
B.
Common law and civil law
(Prepared by Mr. Roy Klassen, Partner ([email protected]), Ms. Lana Lien, Q.C., Counsel (lien@
mcleod-law.com) and Ms. Marissa German, Associate ([email protected]), all of the McLeod Law
LLP firm in Calgary, Alberta.)
Canada is a federation in which the division of powers and responsibilities between the Federal Government
and the Provinces and Territories is governed by the Constitution of 1867. Federal legislation governs matters
such as criminal law and federal taxes. However, most matters of private and civil law, including incapacity
planning, wills, intestate succession (i.e. no will), estates and their administration, beneficiary designations
of retirement plans, life insurance and related products, are governed by the provinces with each having
different legislation.
Furthermore, Canada’s legislation on estate planning and administration is influenced by two legal traditions,
namely the Law of England and Wales, the Common Law and for Québec, the French civil law (“The Paris
Custom”), in both cases subject to modifications, modernisation and adaptations over the years. Historically,
when Canada became part of Great Britain following the negotiations of 1763, Québec was allowed to retain
French civil law in matters of private law; the other provinces adopted the common law of Great Britain at
various times as the provinces formed.
1.
Asset transfer at lifetime/gifts
Property can be transferred during one’s lifetime (“inter vivos”) by gift, to an individual, a trust, to joint
ownership and other methods. There is no gift tax in Canada, although a transfer of property may have tax
consequences otherwise. Generally, both the owner and the recipient must be adults and the age of the
majority ranges in Canada by province from age 18 to 19.
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2.
Basics of transfer on death/right of succession
2.1 Assets passing outside the estate
It is important to distinguish between assets that are and are not part of the deceased’s estate before
determining the legal order of succession. For example, assets held in trust, some assets jointly held,
beneficiary designated assets (retirement plans, insurance and such) and segregated funds pass outside of
the estate to the named beneficiary. Only assets remaining in the name of the deceased then form part of the
estate and then are dealt with as part of the estate and assuming a will, by its terms.
Care is needed when there is joint ownership, especially in provinces other than Québec as there are
different types of joint ownership in common law. Land may be jointly held either as “tenants in common”
where each owner’s interest forms part of the owner’s estate or as “joint tenants” which carries a right of
survivorship where the survivor takes ownership. Jointly owned bank (and other) accounts may be subject to
presumptions of gift in favor of elderly parents, spouses and against other co-owners.
In addition to joint assets, beneficiary designations of certain assets, inter vivos trusts and such, the testator
can deal with their estate in accordance with the respective provincial/territorial legislation by a last will
and testament. Types of wills include formal wills (English style with two witnesses), notarial wills (Québec)
and holographic/hand-written wills. Furthermore, many provinces have more recently taken a flexible
interpretation as to what constitutes a will or “testamentary disposition” with legislation providing for some
flexibility in this regard during the Application for a Grant of Probate or equivalent.
Gifts by will can be either “bequests” which are gifts of actual objects, assets and such, “legacies” of
cash or of the “residue” meaning what remains after bequests, legacies, debts, taxes and testamentary/
administrative expenses.
2.2.1 Testamentary freedom
Unlike many civil law countries (Germany, France, Italy, South America, etc.), Canada does not by and
large have any forced heirship. Notable exceptions include legal obligations to spouses (married or not and
subject to any matrimonial agreements which the courts will consider but are not bound by and “mutual will
contracts” not to change each other’s wills, if any), minor children (and in some cases grand and greatgrandchildren), adult children whom by reason of mental or physical incapacity are unable to earn a living. In
addition to providing for a division of matrimonial property between spouses, if a testator does not provide
support of a spouse or other dependent, the court may and can alter the distribution of the estate to ensure
“adequate provision” for the said class of beneficiaries. British Columbia and Nova Scotia have particular
legislation akin to forced heirship in that members of the immediate family may claim a portion of an estate
without proving financial dependency on the testator, but other forms of planning can be helpful (i.e. trusts,
beneficiary designations, etc.) should a testator not wish to provide for such family members. Therefore,
Canadian testators generally have “testamentary freedom”.
2.2.2 Mutual wills contract
The mutual wills contract is possible where each party has independent legal advice around a contract or
agreement whereby the testators agree not to change their will after the death of the other.
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2.2.3 Trust and Usufruct
As stated earlier, Canada has two legal traditions and the concept of usufruct exists only in Québec. The
more common and related English Law institution of the “trust” is well established both in Québec and the
remaining provinces and territories. When a testator wishes to set conditions on the inheritance and may also
have various tax, family law and other concerns for their heir(s), the testator may create a “testamentary trust”
meaning the will itself establishes the trustee, the trust and the conditions. It is also common for a trust to be
created “inter vivos” or while the testator is alive for similar reasons.
2.3
Administration of the estate
A testator may designate an executor (frequently as trustee) in his/her will to carry out the testamentary
dispositions of the testator. In the common law provinces and territories, although the executor derives
authority from a will, that will may need to be “proved” or probated before that authority is accepted. If a
personal representative was not named in the will, an application to the Court for appointment is prerequisite
to acting. The court order is called a Grant of Probate (or of Administration, as the case may be).
The Application for a Grant of Probate or Administration is known as a “desk procedure” in which the
executor/administrator swears the necessary information and estate inventory (assets and liabilities) under
oath. This assumes no aspect of the will is contested in which case, different procedures apply. Once the
court is satisfied with the contents and veracity of the Application, the court issues the relevant grant (i.e.
court order), allowing the executor or administrator to commence dealing with assets. In Québec, a notarial
will does not require probate (however deadlines exist to accept or reject an inheritance).
3.
Interjurisdictional and transnational aspects
Law on succession
Each province has will and estate legislation dealing with questions of “conflicts of law”, domicile,
international wills (Hague Convention), what assets shall be included in a particular provincial Application
for Grant of Probate (or equivalent) and such. Practically speaking, the executor must determine first which
assets actually form part of the “estate”, whether a court Grant is required, and then determine the situs of
such assets within each province or territory, as well as outside of Canada. For Commonwealth and English
Law countries, it is common to take the provincial “Grant” and have it “resealed” in the jurisdiction where
other assets are held. Furthermore, each province and territory have different tax, probate fee rates and land
transfer fees that may apply. Finally, an executor who does not reside in the Province where the Grant is
issued may be required by each court to provide a “bond” for their administration from an bonding agency,
unless the courts dispense with same. In some circumstances, especially for Civil Law countries, a testator
may choose to execute wills (in the local language and customs) in each country for the particular assets in
that country to simplify the disposition of such assets.
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Cyprus
A.
Tax law
1.
There are no inheritance and gift taxes in Cyprus.
The inheritance law N67/1962 was abolished with effect as of January 1, 2000.
2.
Wealth tax
There is no wealth tax in Cyprus
3.
Cyprus has agreed with many countries worldwide in treaties to mitigate the effects of double taxation. Such
double tax treaties (“DTAs”) may include inheritance taxes, as well.
4.
4.1Expatriate
It is possible that expatriates are subject to taxation in Cyprus although they moved from Cyprus.
Such taxation applies to non-Cyprus resident individuals for which tax is levied only on the income accruing
or arising from sources within Cyprus
4.2
Under the special modes of taxation, the pension income of an individual resident in the Republic of Cyprus,
which arises from services rendered abroad, is taxed at a rate of 5% for amounts exceeding EUR 3,420 per
annum.
4.3Consequences of income tax, especially in the case of a relevant shareholding
in a corporation
There is no tax in Cyprus in case of sale of shares or other titles unless the participation relates to shares in a
non-listed Company that holds immovable property situated in Cyprus. In this case there is capital gains tax
of 20%.
B.
Civil law
1.
Any person who is of sound mind and has completed the age of eighteen years may dispose of any
moveable property by a gift made in contemplation of death if made in the presence of at least two witnesses
who have completed the age of eighteen years and are of sound mind.
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A gift made in contemplation of death can be reclaimed by the donor at any time prior to his death.
Additionally, the gift shall not take effect if the donor recovers from the illness during which it was made; or
the donor survives the person to whom it was made.
Any gift made in contemplation of death shall be treated upon the administration of an estate exactly in the
same way as if it were a specific legacy.
2.
Under Cyprus law the devolution of a person’s estate upon his/her death can be done in accordance with the
law of succession or by drafting a will. However, restrictions are imposed on the portion of the estate that can
be distributed by will (“disposable portion”) as the law requires a portion of the estate to be distributed to the
deceased’s family (“statutory portion”).
2.1
If a person dies intestate the court will appoint a person to administer the estate. This person is called
the “administrator” of the estate. The administrator is responsible for paying the funeral and testamentary
expenses and all the debts of the deceased and can sell such part of the immoveable property of the
deceased as may be necessary and may raise money thereon by way of mortgage or charge.
Where a person dies leaving a spouse, then the spouse shall (once all the liabilities have been discharged) be
entitled to a share in the undisposed portion of the estate where there is a will. Where there is no will, then
the spouse shall be entitled to a share of the whole of the estate.
The spouses share depends on what other family members the deceased has. If apart from the spouse, the
deceased has:
• any children or grandchildren, the spouse’s share shall be equal the share of each child;
• father, mother, sister, brother, uncle or nephew, the spouse’s share shall be equal to one half of the estate;
• cousin or child of a nephew, the spouse’s share shall be equal to three-fourths of the estate;
• no close relatives, the spouse’s share shall be equal to the whole of the estate.
Subject to the abovementioned rights of the spouse the law divides the heirs of the deceased into four
classes, places them according to degree of proximity of relationship to the deceased and sets out the
shares in which the heirs of each class are entitled to succeed to the estate in the following way:
First Class
The children of the deceased, in equal shares. In the event of the prior death of any of the children of the
deceased, if that child has left any children then they would be entitled to the share of their parent in equal
shares.
Second Class
The father/mother of the deceased living at his/her death and brothers and sisters of the full and half-blood
all would be entitled to the share in equal shares. In the event of prior death of any of the above mentioned,
their descendants are entitled to the share in equal shares per stripe.
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Third Class
The ancestors of the deceased nearest in degree of kindred living at his death are entitled to equal shares.
Fourth class
The nearest kin of the deceased living at the death within the sixth degree of kindred, the nearer degree
excludes those more remote in equal shares.
Where the deceased leaves no spouse and no kin living at his/her death within the sixth degree of kindred
he/she will be taken to have died without heirs and the undisposed portion of his/her estate will become the
property of the Republic of Cyprus.
2.2
A testator may control his/her succession by a making a will. A will is defined as the legal declaration in
writing of the intentions of a testator with respect to the disposal of his/her moveable property or immoveable
property after his/her death and includes codicil. The will, apart from its main function of disposing of the
estate of the deceased or at least such part of it as is free to testamentary disposition, may include other
important provisions such as pardoning a person otherwise incapacitated to succeed or recognising an
illegitimate child.
Every person who is of sound mind, memory and understanding and who has completed the age of 18 may
make a valid will thereby disposing of the whole or any part of the disposable portion of his/her estate.
2.3
2.3.1 Last will
The last will is the main type of testamentary disposition and comprises of several types of forms and orders
one being appointing heirs and distributing the disposable portion of the estate.
Apart from a will the law does provide for other types of testamentary dispositions.
2.4Legacy
A “legacy” is defined by law as a gift of will of moveable property or immoveable property and a “legatee” is
accordingly the person to whom the legacy has been granted.
According to the provisions of law, no legacy shall be valid if made to a person who is not in existence at the
time of the death of the testator (except a legacy to a posthumous child of the testator shall be valid) and
likewise, no legacy shall be valid if it does not express a definite intention.
The law further makes provision that where any person being a child or other issue of the testator to whom
a legacy shall be left dies in the lifetime of the testator leaving issue, and any such issue of such person are
alive at the time of the death of the testator, such legacy shall not lapse, but shall take effect as if the death
of such person had happened immediately after the death of the testator, unless a contrary intention shall be
expressed in the will. Where a legacy is conditional and is dependent upon an impossible, illegal or immoral
condition, such condition shall be void but the legacy shall be valid.
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Where the legacy in question is a legacy to a religious corporation, and the testator has relations within the
third degree of kindred, the testator may not bequeath a legacy to a religious corporation, save by a will
executed at least three months before his/her death.
2.5Usufruct
The underlying principle of Cypriot Land Law is that every interest or right over or affecting immovable
property is registered and can be traced in the Registries of the Lands and Surveys Department kept in the
District Land Offices.
A testator can register the usufruct on the immovable property with Registry and thus when a gift is made,
the usufruct right will exist even upon the transfer of the legal title to the new legal owner of the property.
2.6
Form of testamentary dispositions
A will must be in writing and must be executed in the following manner:
• It must be signed at the footer line or end thereof by the testator or some other person on his/her behalf,
in his/her presence and by his/her direction;
• Such signature must be made or acknowledged by the testator in the presence of two or more witnesses
present at the same time;
• Such witnesses must attest and must subscribe the will in the presence of the testator and in the
presence of each other but no form of attestation will be necessary; and
• If the will consists of more than one sheet of paper each sheet must be signed or initialled by or on behalf
of the testator and the witnesses.
Strict adherence to the formalities mentioned above is mandatory and must be complied with rigidly
otherwise the will shall be rendered void.
2.7
The law requires a portion of the estate to be distributed to the deceased’s family and this is known as the
statutory portion. Therefore in the case whereby a testator leaves a will, the statutory portion is protected and
the disposable portion of the estate is distributed under the will.
To calculate the disposable portion, the law expressly provides that where a person dies leaving a spouse
and a child or a spouse and a descendant of a child, or no spouse but a child or a descendant of a child,
the disposable portion of the estate shall not exceed one quarter of the net value of the estate. Where the
deceased leaves a spouse or a father or a mother, but no child or descendant of a child, the disposable
portion extends to one half of the net value of his/her estate. Where the deceased leaves neither spouse, nor
child nor descendant of a child, nor a father nor a mother, the disposable portion shall be the whole of the
estate.
2.8
Family foundation/trusts
There are three forms of trusts which can be set up in Cyprus:
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Local Trust
The settlor, the trustees and the beneficiaries are Cyprus residents and the trust property may include
immovable property in Cyprus.
Offshore Trust
The settlor and the beneficiaries may not be resident in Cyprus. The majority of the trustees, whether
individuals or trust companies (including offshore Cyprus trust companies) must be Cyprus residents. The
trust must be located in Cyprus so that Cyprus law applies and the Cyprus courts have at least concurrent
jurisdiction. The trust income must be generated from sources outside Cyprus, but the trustees may hold
immovable property in Cyprus if they obtain the required permit from the Council of Ministers. The trust deed
must be executed in Cyprus.
International Trust
International trusts are regulated by the International Trusts Law, No. 69/1992, which was substantially
amended and modernised in 2012, giving Cyprus one of the most modern and beneficial trust regimes in
the world. The Cyprus International Trust provides settlors with formidable asset protection features and
significant succession and tax mitigation benefits. Flexibility, control, confidentiality and perpetuity are added
benefits of Cyprus International Trusts.
2.9
Execution of the will
The testator under a will can appoint an executor whose responsibility is to pay the funeral and testamentary
expenses and all the debts of the deceased and can sell such part of the immoveable property of the
deceased as may be necessary and may raise money thereon by way of mortgage or charge.
The executor is also responsible for distributing the statutory portion of the estate as well as the disposable
portion of the estate in accordance with the will.
3.
3.1
Law on succession
The question of domicile is very important when considering succession law and probate. Cyprus law
expressly regulates the succession to the estate of all persons domiciled in Cyprus; and the succession to
the immoveable property located in Cyprus of all persons not domiciled in Cyprus. Therefore the question of
domicile is a prerequisite in order to establish whether Cyprus law will apply.
Under the law, every person has at any given time either the domicile received by him/her at his birth
(“domicile of origin”) or a domicile acquired or retained by him by his/her own act (“domicile of choice”). In
order to acquire a domicile of choice, a person must establish physical residence in a place and demonstrate
sufficient intention of making that place his/her permanent home. The domicile of origin prevails and
is retained until a domicile of choice is, in fact, acquired, and a domicile of choice is retained until it is
abandoned whereupon either a new domicile of choice is acquired or the domicile of origin is resumed. For
the purposes of succession to moveable property, no person can have more than one domicile.
3.2
See general description as outlined on page 4 which also applies to Cyprus.
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France
A.
Tax law
1.
1.1
Taxable event
Inheritance tax and gift tax are imposed by the state on property acquired by inheritance or gift. The rules
differ slightly according to whether the acquisition of the property was by inheritance or by gift, but are
basically the same. In addition to gift tax, registration duties are levied on the value of assets transferred by
gift.
In France, the taxable assets are based upon the French Civil Law. However, some dispositions are not
included in the Civil Code.
1.2
Taxable person and taxable assets
In the general case if the testator has his/her abode in France at the time of death, or if the donor has his/
her abode in France at the time the gift was passed, all the assets are taxable in France, wherever they are
located and whatever their nature is.
An individual is domiciled in France if he or she fulfils one of the following four criteria:
• The individual has his/her home in France. In general, an individual’s home is the place where he/she or
his/her family usually lives, i.e. where his/her usual place of abode is. This definition allows France to tax
an individual working abroad if his/her family (spouse and children) lives in France.
• The individual has his/her principal place of abode in France. This criterion focuses on where the individual
spends most of his/her time, even if he/she is in a hotel while his/her family lives abroad. In general, if an
individual spends more than 183 days in France during a calendar year, he or she will be deemed to have
his/her principal of abode in France.
• The individual engages in a business activity in France. An individual is subject to French income tax if he/
she engages in a remunerative activity in France (salaried or not), unless the business activity is simply
accessory.
• The individual has the center of his/her economic interests in France. An individual has the center of his/
her economic interests where he/she manages his/her investment activity or where the headquarters
of his/her personal business activities are located. This could be the place from which he/she earns the
majority of his/her income.
If the donor or the testator is not or was not domiciled in France, the following distinction has to be made in
order to determine the basis of the assessment:
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• If the beneficiary is domiciled in France at the transfer date or has been domiciled there for at least six of
the previous ten years, duty on transfers without valuable consideration is payable on movables and real
property situated in or outside France;
• If the beneficiary is domiciled outside France, transfer duty is payable only on the French assets he or she
receives.
1.2.2 Limited tax liability in the case of domestic assets
Domestic assets are understood to mean assets that have an especially close connection to France because
they are located there, belong to French domestic business premises or have at least been registered in a
French public register. Domestic assets include:
• domestic agricultural and forestry assets;
• domestic landed property;
• domestic business assets;
• shares in a capital company if the company has its registered office or management in France;
• economic goods that are left to a business enterprise, especially rented or leased to said business enterprise;
• mortgage debts, rent charges, insofar as they are directly or indirectly secured by domestic real estate;
• claims from the participation in a commercial trade as silent partner or profit participation loans;
• rights of utilisation in one of the aforementioned assets.
1.3
Maturity of taxes
In the case of acquisition mortis causa, tax generally arises upon death of the testator.
In the case of gifts inter vivos, the gift is passed on a contractual basis and should be expressly accepted by
the donee (Civil Law, art. 932). The tax arises when the written commitment is signed by the respective parties.
1.4
Calculation of the taxable acquisition
The inheritance tax claims are based upon an estimative statement made by the liable people. In most of the
cases, the assets transferred are measured according to the fair market value or the current value. Such rule
is applicable both to acquisitions mortis causa and inter vivos.
For some assets, different rules apply: e.g. some allowances only apply to acquisitions mortis causa, others
only apply to acquisitions inter vivos.
1.5
Rules of valuation
There is no French legal definition of the “current value”. That is an economic definition. It corresponds to the
arm’s length principle.
Jewellery, works of art and collection items transferred mortis causa must be declared at their estimated
value, but not below their insurance value.
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Furniture may be valued notionally at 5% of the estate. Where rights are attached to the property transferred
such rights and property are split accordingly to the bare economic ownership and the tax is imposed on a
certain percentage of the value at the ratio of the right transferred.
Inheritance tax is levied on the value of the transferred assets less related liabilities. In the case of gifts,
liabilities are not deductible, except in some limited cases.
1.6
Tax exemptions
Certain assets are wholly or partly exempt from inheritance tax. These exemptions are either related to the
nature of assets transferred, e.g. immovable property classified as historical monument or woodland or to
the quality of the deceased, e.g. estates of victims of wars and terrorist acts and/or to the quality of the
beneficiary, e.g. non-profit organisations.
A 50% inheritance tax exemption applies to immovable property located in Corsica which is transferred
mortis causa in the period from January 1, 2013 to December 31, 2017.
1.7
Tax-free amounts/preferential treatment of business assets
The shares transferred mortis causa or inter vivos are partly exempt of inheritance and gift taxes.
Under certain holding commitment conditions, 75% of the share value in companies and assets in
businesses is exempt from inheritance and gift tax, provided that at least one of the beneficiaries undertakes
to run the company or the business. This legal device is called “Pacte Dutreil”.
This partial tax exemption applies to the following cases:
• transfer of company shares if the company has an industrial, commercial, handmade, agricultural or
liberal activity;
• transfer of holding shares if the company holds interests in a company under holding commitment
conditions.
Such partial tax exemption is subordinated to the following conditions:
• The holding commitment has to be undertaken for at least two years from the date of the register act.
• The commitment exists at the date of the transfer. It is taken by the testator or the donor.
The commitment should carry on:
• at least 20% of shares in a Public Company;
• at least 34% of shares in a Private Company.
The commitment is legally achieved if the testator or the donor holds the percentage of shares (see above)
for at least two years and if he/she has his/her main activity in the company for at least two years.
However, in case of lack of engagement, the holding commitment should be taken by the successors six
months after the death in an agreement contracted with the other successors or the shareholders.
• at the date of the transfer, each inheritor or donor commits to hold the shares for at least four years. The
period starts from the end of the two years period end.
• the successor or the donor who takes the holding commitment should have:
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• his/her main activity in the corporation partnership;
• a managerial position for the company subjected to the income tax.
If the holding commitment does not comply with the French law, every inheritor or donee will have to pay the
inheritance or the gifts tax plus the interest on arrears. However, if one of the inheritors/donees sells his/her
shares, the tax does not apply to the other inheritors/donees if they respect their holding commitments.
If the condition linked to the practice of activity inside the company does not comply with the respective Law
anymore, all the inheritors/donees will have to pay the inheritance or gift tax.
1.8
Tax-free amounts/preferential treatment of real estate
According to the general rule, real estate is measured at the current market value. However, a deduction of
20% is granted if the building is also occupied by the spouse respective the life partner or by the children.
The deduction is also applicable if the children or the spouse are physically unable to work because of a
physical or a mental disability.
The deduction of 20% does not apply in the event of a gift.
1.9
Personal allowances
Acquirers may be granted personal allowances in dependence on the degree of kinship to the testator:
• Allowance in ascending line (children and grandchildren if the children died) of EUR 100,000. In case the
children are deceased, the allowance is divided between the grandchildren;
• If the children are disabled, the allowance raises up to additional EUR 159,325;
• Allowance of EUR 15,932 applies to siblings;
• Allowance of EUR 7,967 applies to nephews and nieces;
• Allowance of EUR 1,594 if none of the above allowances applies.
The same allowances apply to acquisitions inter vivos. However, some special allowances apply to gifts:
• Allowance of EUR 80,794 applies to spouses or civil partners (PACS);
• Allowance of EUR 31,865 applies to gifts made to grandchildren;
• Allowance of EUR 5,310 applies to gifts made to great-grandchildren;
• Allowance of EUR 300,000 applies to gifts passed by employers to the respective employees. The
allowance is subject to the following conditions;
• The company performs an industrial, commercial, handmade, agricultural or liberal activity;
• The donees have had a labor contract for at least two years and have practiced their job in full time;
• From the date of the gift, the donees have to carry on the business for five years;
• The business (or the customer base) has been acquired two years previously by the donator (same case
applies to the acquisition of shares).
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1.10 Tax rates
The progressive or the proportional rate varies according to the value of the assets transferred and the
degree of kinship between the deceased and the inheritor or the donor and the donee. There are several
different scales:
Inheritances and gifts to direct descendants:
Fraction of net taxable part
(EUR)
Rate (%)
Calculation of the tax claim
(A = taxable asset) EUR2
5
A x 0,05
8,072-12,109
10
(A x 0,1) – 404
12,109-15,932
15
(A x 0,15) – 1,009
15,932-552,324
20
(A x 0,2) – 1,806
552,324-902,838
30
(A x 0,3) – 57,038
902,838-1,805,677
40
(A x 0,4) – 147,322
Over 1,805,677
45
(A x 0,45) – 237,606
Rate (%)
(A = taxable asset) EUR
Up to 24,430
35
A x 0,35
Over 24,430
45
(A x 0,45) – 2,443
Up to 8,072
In case of inheritance between siblings:
(EUR)
Others:
Rate (%)
Between relatives to the fourth degree included
55
Between relatives to the fifth degree included and third party
60
2
60
Refers to the transferred assets.
Gifts between spouses:
(EUR)
Rate (%)
5
A x 0,05
8,072-15,932
10
(A x 0,1) – 404
15,932-31,865
15
(A x 0,15) – 1,200
31,865-552,324
20
(A x 0,2) – 2,793
552,324-902,838
30
(A x 0,3) – 58,026
902,838-1,805,677
40
(A x 0,4) – 148,310
Over 1,805,677
45
(A x 0,45) – 238,594
Up to 8,072
Double taxation does not occur to all the assets located out of France (Code Général des Impôts – art. 784).
In case where the beneficiary is not domiciled in France, only the assets received and located in France are
subject to inheritance and gift tax.
If both parties are not domiciled in France, the shares of the foreign companies are not subject to inheritance
and gift tax. However, if the shares are related to companies which hold 50% of real property located in
France, they are subject to inheritance and gift tax limited to the part of assets located in France.
Real property located in France held by foreigners is also subject to inheritance and gift tax.
2.
Wealth tax
In France, wealth tax is an annual tax payable by individuals on account of their ownership of personal
assets. On January 1 of the year of taxation, the tax is triggered if the net value assessed exceeds a certain
amount. The tax was introduced in 1989.
Taxpayers having assets of EUR 1,300,000 or more are still liable to wealth tax on the basis of the former
progressive scale by band, even for the band between EUR 800,000 and EUR 1,300,000.
People domiciled in France are taxable on their assets located in and outside France (taxation on “worldwide
assets”). People not domiciled in France within the meaning of French Domestic Law are taxable only on
their assets located in France. People who transfer their domicile to France are only taxable on their assets in
France during the five years following their establishment in France,.
The tax base includes all assets, rights and values belonging to the taxable person on January 1 of the year
of taxation (developed and undeveloped land, sole proprietorship, farms, furniture, financial investments,
cars, aircraft, pleasure craft, etc).
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The amount of tax is determined by applying a scale, updated each year, to the tax base:
(EUR)
Rate (%)
0
Ax0
800,000-1,300,000
0,50
(A x 0,005) – 4,000
1,300,000-2,570,000
0,70
(A x 0,007) – 6,600
2,570,000-5,000,000
1
(A x 0,01) – 14,310
5,00,000-10,000,000
1,25
(A x 0,0125) – 26,810
Over 10,000,000
1,50
(A x 0,015) – 51,810
Up to 800,000
3.
Under domestic law, foreign inheritance and gift taxes paid on moveable or immovable property situated
abroad may be credited against the tax due in France on that same property.
France has concluded DTAs to avoid double taxation of inheritances with Algeria, Austria, Bahrain, Belgium,
Benin, Burkina Faso, Cameroon, Canada (part of the 1995 protocol to the DTA on income tax), the Central
African Republic, Congo (Rep.), Finland, Gabon, Germany, Guinea, Italy, Ivory Coast, Kuwait, Lebanon, Mali,
Mauritania, Mayotte (treaty originally concluded with the Comoros), Monaco, New Caledonia, Niger, Oman,
Qatar, St. Pierre and Miquelon, Saudi Arabia, Senegal, Spain, Sweden, Togo, Tunisia, The United Arab
Emirates, the United Kingdom and the United States.
The treaty with Austria, Guinea, Germany, Italy, New Caledonia, St. Pierre and Miquelon, Sweden and the
United States also cover the taxation of gifts.
The inheritance tax agreement concluded between France and Switzerland on December 31, 1953 was
denounced by France on June 17, 2014. The termination took effect on January 1, 2015.
4.
4.1Expatriate
In principle, persons not domiciled in France must file an annual return reporting all their income if they have
income from French sources or one or more homes in France. The rules for income received by persons
domiciled in France are the same in principle for income received by persons not domiciled in France.
However, specific arrangements exist.
Withholding tax is applied to some income from French sources received by persons not domiciled in
France. In some cases the withholding tax may discharge the income tax liability partly or in full, meaning that
progressive rates of tax are not applied to the income.
The relocation abroad triggers an exit tax. The person is taxed on the income tax and supplementary social
levies which are based upon the unrealised gains, the receivables in the case of an earn-out agreement and
report of realised gains.
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However, the person could obtain a deferment of taxation if he/she goes to a country belonging to the
European Economic Area (“EEA”) (European Union, Norway, Liechtenstein and Iceland).
4.2
Subject to the provisions of tax treaties for the avoidance of double taxation, regardless of their nationality,
persons not domiciled in France are taxable in France on their income from French sources only.
Under Article 164 B CGI aforesaid, the pensions and the retirement benefits are also deemed income from
French sources if the payer of the income has his/her tax domicile or is established in France.
The withholding tax occurs when the beneficiary leaves the country and will be subject to unlimited tax
liability on his worldwide income in his/her new country of residence.
The withholding tax applies if there is a double taxation agreement between France and the country. The
agreement could avoid France to tax the pensions and the retirement benefits.
4.3Consequences of income tax, especially in the case of a relevant share holding
in a corporation
The relocation abroad triggers the taxation with income tax:
• unrealised gains on shares held in a company;
• receivables related to an earn-out agreement;
• some realised gains in a tax report.
The taxpayer could have a tax deferral when he/she leaves France to move to a country in the EEA.
When the taxpayer leaves France to move to another country outside the EEA, the tax is immediately payable.
However, the taxpayer should expressly ask for the deferment of the exit tax.
B.
Civil law
1.
A donation is a legal act where the donator abandons an asset to the donee without counterpart and free of
charge. The donee must accept the donation.
Usually, a donation should be formalised by a written act. The donation inter vivos could be notarised. In
some cases, the donation does not have to be notarised, e.g. donations of cash, moveable assets (furniture,
jewelry, work of art), shares and bonds.
In other cases, the donation must be notarised:
• donation of a real property;
• donation between spouses;
• donation in a wedding contract;
• share gift.
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2.
The right of succession is the right given to the assets, the rights and actions who belonged to the testator
at the time of his/her own death. All the rights go to the heirs. The right of succession rules the legal relations
between the heirs themselves and the third parties.
The term also defines the transfer of the rights from the testator to the heirs.
2.1
Inheritance is the set of rights and obligations of the testator. It includes the rights, property and obligations
of a person and consists of the assets and liabilities. By assets, it means all receivables and assets, whatever
they are: inanimate or living things (plants, animals), movable or immovable, tangible or intangible, present or
future belonging to the person. On the credit side, inheritance contains all the person’s debts.
At the time of the death, the inheritance is called the inheritance.
A donation or a testamentary contract could change the legal order. However, the donation or the
testamentary contract are limited by the freely disposable portion or the reserved portion of the heritage (all
the heirs are entitled to a minimum share of the deceased’s estate).
In succession, the distribution rules of inheritance between the heirs of the deceased are set by the French
Civil Code.
The heirs are classified according to an order determined by the proximity of their family relationship with the
deceased. The heirs are divided into the following four categories:
• The first group includes the descendants: children, grandchildren, great-grandchildren of the deceased;
• The second order includes the privileged ascendants: the father and mother of the deceased and the
privileged collaterals: brothers and sisters, perhaps the descendants of them;
• The third order includes the ordinary ascendants: grandparents and great-grandparents;
• The fourth order ordinary collateral includes: aunts, uncles and cousins to the sixth degree inclusive.
Each order premium supplants the following order: the presence of a sole heir in a certain order prevails
over the heirs of the following orders. The surviving spouse is not really an order, but he/she benefits from
important rights. When the deceased leaves children or descendants from two spouses, the surviving
spouse chooses between the usufruct of all the existing assets and the ownership of the succession. In the
presence of children or uncommon descendants (children from a first marriage, only children adopted by the
deceased or natural children), the surviving spouse receives a quarter ownership of existing assets.
2.2
It is a written document by which the testator expresses his will and how his assets will be distributed after
his death. His/her will can result either from an authentic instrument or a private document.
It is a crucial act as it may arrange his/her entire estate for the future, which may influence the heirs of which
some are protected by the act (which gives them a right of reservation ).
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2.3
2.3.1 Last will
The mystic will or secret (art. 976 of the Civil Code) is a private document that can be written by the testator
or printed or typed. It is presented closed, stamped and sealed and delivered to a notary who draws up an
act of subscription, in the presence of two witnesses.
The witnesses sign it with the notary and the testator. In this act, the testator declares the document
delivered contains his/her last will. The notary should confirm that the document reflects the effective wills of
the testator as they are laid down.
The testamentary contract should have two different forms as following:
• The authentic testament is the one that is received by one or two notaries and two witnesses (Articles
971 and following of the Civil Code);
• The private agreement holographic will is said when fully written, dated and signed by the testator. It
must be presented in original and not a copy because the lack of the original implies that the testator has
destroyed it (art. 970 of the Civil Code).
2.4Legacy
The “legacy” is a reward granted by the testator. The legacy is added to the general legal rules of succession.
The purpose of the testator is to assign either a part of his estate to a person who was not normally called,
or to assign to one of his legal heirs a share of an amount exceeding the share the inheritance law holds. The
beneficiary of a bequest is called the “legatee”.
However, the generosity of the testator in favor of the legatee is limited by the rights of heirs to whom the law
assigns a unit of a minimum quotaof which the testator can freely dispose. If he leaves legacies by ignoring
the rights of forced heirs, the share of people who would have been gratified to disregard the right of a
compulsory heir could be reduced by a judgment. The alienation of the property bequeathed by the tutor of
an incapable is a total loss of the asset bequeathed which results in the lapse of such legacy.
2.5Conditions
The testator can only dispose if he has legal capacity.
Accordingly, an unemancipated minor may not, in principle, set up a testamentary. However, this prohibition
is mitigated by the possibility for minors over 16 years to transfer half the property he could if he was older
than 18 years old.
The adults under guardianship can write a testamentary with the authorisation of the guardianship judge or
the family council if one exists.
Such requirement of consent covers different realities:
• The testator must not have been misled by others maneuver;
• The testator must not have been “forced” physically by legal intimidation or pressure;
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• There should not be any mistake on the person of the beneficiary or about the subject of the testamentary;
• It should not be the reason if the testator was mentally disturbed at the time of writing (e.g. insanity).
In case of non-compliance with these conditions of “substantive validity”, the document can be cancelled
within 5 years after the death of its author.
2.6Usufruct
The usufruct is the right to use certain parts of the asset or to receive income (e.g. in case of real estate by
earning rents, in case the usufruct relates to receivables to obtain financial interests or with regard to holding
shares in a corporation to receive dividends).
Whatever nature the asset is (i.e. a movable asset or a building), the owner of the usufruct is free to use it. He
can decide to live in the apartment, to let it unoccupied, or to rent it out.
On the other hand, he has to bear certain expenses. In the case of an apartment, for example, he will have to
pay property tax and, if resident, residence tax.
2.7
The authentic testamentary requires numerous mandatory particulars such as the name and place of
business of the notary, the names and addresses of the witnesses and the parties and possibly other
signatories, the place where the act is passed and when each act is signed.
It is written in a minute. It is imperative that the document will be dictated by the testator to the notary
himself.
2.8
The right to a statutory share is the part of the estate and the rights that the law ensures free devolution
accrued to some heirs called “reserving” if they are called to the estate and if they accept it. Since Law No.
2006-728 of June 23, 2006 entered into force on January 1, 2007, donations inter vivos or by will may not
exceed three quarters of the property if the deceased leaves behind a surviving spouse and is not divorced.
According to the Civil Code, the share of the estate and rights not restricted by law which the deceased
could freely dispose is called the “available quota”. The donation made in succession from advancing to a
compulsory heir who accepts the succession is deducted from his/her share of reserves and, alternatively,
the disposable portion, if it has not been otherwise agreed in the deed of gift. The excess may be reduced at
the request of heirs.
2.9
Family foundation is formalised by an act where one or more founders proposing to allocate property rights
or resources to carry out a work of general interest and non-profit. This intention must be clear and without
any ambiguity.
About the management, there are two types of foundations:
• the foundation with a board of directors who elects a chairman among its members;
• the Foundation with a Management Board and a Supervisory Board.
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The taxpayers of wealth tax can deduct 75% of the amount of cash donations and donations of public
companies if such are full ownership shares from the amount of tax assessed, within the limit of EUR 50,000
per year.
Upon liquidation of the family foundation, the remaining net assets shall be vested in one or more non-profit
organisations with similar aims.
From the Anglo-Saxon “trust”, the trust corresponds to a transfer of ownership limited in its use and over
time. This institution facilitates the creation of security and management of assets on behalf of others.
Trusts are not commonly used in France.
For the transfer of his/her assets, the testator may name an executor. Such executor’s role is to monitor
the execution of the will, and to take the necessary measures for appropriate execution (e.g. respect and
performance of the will).
It may therefore be necessary to:
• conduct an inventory of the assets of the estate;
• sale of the furniture in case of insufficient liquidity to meet urgent debt related to the estate;
• take possession of all or part of the movable property;
• pay the bequests.
If there are no heirs (i.e. descendants or spouse), it may also be required to:
• partially or fully sell real property;
• place the capital;
• settle debts and expenses;
• divide the property among legatees.
The executor does not have to be paid, unless otherwise expressed by the testator (possibility to appoint one
or more executors).
3.
3.1
Law on succession
The law on succession will help to determine who are the heirs and their respective rights.
3.2
See general description as outlined on page 4 which also applies to France.
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Germany
A.
Tax law
1.
The fundamental regulations concerning inheritance and gift tax are laid down in the Inheritance and Gift Tax
Law (“Erb- und Schenkungsteuergesetz – ErbStG”). In contrast to the (especially Anglo-American) estate tax
system, German inheritance tax is levied as hereditary succession tax, which means that the estate is not
taxed as a whole, but the enrichment of the inheriting person depending on his or her personal situation.
1.1
Taxable event
According to the ErbStG, the tax applies to any gratuitous acquisitions due to death (“mortis causa”) and
amongst the living (“inter vivos”). Taxable acquisitions mortis causa include:
• earning by inheritance;
• by bequest/legacy;
• due to claims for statutory shares;
• acquisition by a gift in contemplation of death;
• any pecuniary advantages due to a contract concluded by the testator in favor of third parties (e.g. life
insurance).
Also the transfer of assets to a foundation determined by the testator or the endowment of an estate under
foreign law created by the testator constitute taxable acquisitions.
Further taxable events include gifts inter vivos and thus any generous gifts which enrich the acquirer at the
expense of the person providing the gift. Events equal to a gift include:
• waiver of a distributive share or statutory share;
• transfer of assets due to a foundation inter vivos as well as the formation and endowment of a foreign
estate.
In principle, the same provisions apply for gifts as for acquisition mortis causa.
The German ErbStG is shaped by civil law, i.e. the processes of tax formation are in principle determined
by civil law. In the case of international cases of succession it is also frequently determined by the conflict of
law provisions or the succession rules that foreign civil law is to be applied for the case of succession (see
paragraph 3.1 below). The basic matters of fact of the German ErbStG are not only limited to the processes
of acquisition according to German civil law but also embrace processes of acquisition according to foreign
law.
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Procedures
Every recipient – regardless whether heir, legatee, donee etc. and regardless whether being an individual or
a legal entity – has the obligation to notify the German tax authorities on a transfer which is subject to the
ErbStG within three months. In cases of acquisitions inter vivos this obligation is extended to the donor. The
three months period starts generally speaking with having knowledge of the transfer. In cases of acquisitions
mortis causa this is usually with the beginning of the probate (“opening of the will”). The obligation continues
to exist until it is fulfilled.
Notifications are not necessary if the German tax authorities are already informed by a court or a notary
public, if the court or notary public fulfill their own notification obligations therewith. This is always the case if
a donation is certified by a German notary public.
Advance Binding Ruling (“Verbindliche Auskunft”)
Upon request, the German tax authorities may grant an advance binding ruling on the tax treatment of
precisely determined, not yet realised facts, if with regards to the significant tax implications a special interest
exists.
Especially in cases of a complex structuring of donations and transfers inter vivos with unclear but potentially
higher tax consequences requests for advance binding rulings are advisable.
1.2
Tax liability is linked to the persons forming part of the transfer and/or to so-called domestic assets. In case
of an acquisition mortis causa the heir is solely liable to inheritance tax. For tax levied on gifts, the donee and
donor are jointly liable.
Unlimited tax liability applies if the testator is a German resident at the time of death, if the donor is a German
resident at the time the gift is effected or if the acquirer is a German resident at the time the inheritance tax
arises. Thus, it is sufficient for unlimited tax liability if one of the two persons involved is a German resident at
a certain point in time. Also individuals who have their habitual abode in Germany are regarded as unlimited
tax liable.
In contrast to many other fields of law, tax liability is not linked to nationality. The unlimited tax liability extends
to the assets worldwide, i.e. to all assets, no matter in which country they are located.
If it is not a case of unlimited tax liability (neither testator/donor nor heir/donee have a place of residence or
a habitual abode in Germany), the inheritance or gift may be subject to taxation in Germany, if “domestic
assets” are transferred. “Domestic assets” are understood to mean assets that have an especially close
connection to Germany because they are located there, belong to domestic business premises or have at
least been registered in a public register. Domestic assets include:
• domestic agricultural and forestry assets;
• domestic real property;
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• business property of a permanent establishment or such property owned through a permanent agent in
Germany;
• shares in a capital company if the company has its registered seat or management in Germany and the
shareholder alone or together with other affiliated persons directly or indirectly holds a share of at least ten
percent in the company;
• inventions or utility models that are entered in a domestic book or register;
• economic goods that are left to a business enterprise, especially rented or leased to said business
enterprise;
• mortgage debts, rent charges as they are directly or indirectly secured by domestic real estate;
• claims from the participation in a domestic commercial trade as silent partner or profit participation loans
if the debtor is a resident individual, partnership or company;
• rights of utilisation in one of the afore mentioned assets.
In addition, rights to a pension and other rights to regular benefits, which one non-resident taxpayer provides
to another non-resident taxpayer, are not subject to limited tax liability, unless they are secured by domestic
real estate.
In the case of limited tax liability foreign inheritance tax cannot be offset (see paragraph 1.11 below), since
setoff only is to take place in the case of unlimited tax liability.
1.3
Maturity of taxes
In the case of acquisition mortis causa, tax generally arises upon death of the testator. In the case of gifts
inter vivos, the tax arises at the time the gift is effected. Thus, a mere promise of a gift does not trigger taxes.
Rather, the point of time at which the donee receives the gift and is enriched is decisive.
1.4
The basis for the calculation of the tax is determined by the enrichment of the acquirer. In the case of
acquisition mortis causa it has been determined that the enrichment results from the entire amount of the
inheritance less the estate liabilities. The ErbStG does not provide any regulation for determining the value of
gifts inter vivos. In this case the enrichment also needs to be determined.
1.5
Rules of valuation
The valuation of the transferred assets is principally based on the provisions of the German Valuation Law
(“Bewertungsgesetz – BewG”). Unless prescribed otherwise by law, the actual value (that would be achieved
in the ordinary course of business) is to form the basis for valuation. Debts can frequently be deducted if
they are economically related to the taxable domestic assets. Comprehensive specific provisions exist for
valuation of securities, shares, debt register claims, capital claims and debts as well as for business assets.
1.6
Tax exemptions
There are extensive tax exemptions for various types of acquisitions, e.g. acquisition of real estate, works of
art or grants to benefited acquirers. Furthermore, tax exemptions exist for the acquisition of business assets.
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1.7
Preferential treatment of business assets
According to current law, all types of business assets initially have to be recognised like any other type
of assets at current market value. Since the business assets are recognised at current market value as
assessment basis, a preferential treatment of business assets was introduced as compensation, which may
in the individual case be quite substantial. Such tax benefits apply for agricultural or forestry operations,
business enterprises and freelancers. Shares in corporations can be treated preferentially if the company is
resident in a state of the EU/EEA and the testator or donor holds a share of more than 25% in the nominal
capital of the company.
Two different models exist with respect to tax exemptions, a basic model (“regular exemption”) and an option
model (“full exemption”). If certain prerequisites are met, in the basic model 85% of the business assets are
excluded from inheritance/gift taxation and only the remaining part of 15% is subject to taxation. The basic
model is applied if essentially the following prerequisites are met: The heir must continue the business enterprise
maintaining the significant corporate structures for five years (“retention period”). During the retention period
the entire sum of salaries must not fall below an amount of 400% of the initial sum of salaries. It is another
prerequisite that the share of so-called “administrative assets” in the total assets is not larger than 50%.
Full exemption of the business assets can only be achieved upon irrevocable request. In this case the
retention period amounts to seven (instead of five) years. Within the seven years the sum of salaries must not
fall below an amount of 700% of the initial sum of salaries and the share of the administrative assets must
not be larger than 10%.
The German Federal Constitutional Court (“Bundesverfassungsgericht – BVerfG”) decided on December 17,
2014 that the preferential treatment of business assets within the framework of cases of succession and
gifts is not fully in conformity with the principle of equality. Therefore, the lawmaker was ordered to pass
a new version of the Inheritance and Gift Tax Law by June 30, 2016. A current draft law of the German
Federal Ministry of Finance aims at leaving the basic concept of the current inheritance law unamended, but
establishing a so-called “economic need test” for an exemption from inheritance/gift tax for large business
assets. Accordingly, the individual parts of business assets shall in future only be treated preferentially if they
constitute business assets in the proper meaning of the word.
1.8
Preferential treatment of real estate
Real estate must principally be recognised at current market value. However, a deduction of 10% is granted
if the property or parts of the property are rented for residential purposes, are located in Germany, a state of
the EU or the EEA, and are not treated preferentially as business assets.
1.9
Personal allowances
Acquirers may be granted personal allowances in dependence on the degree of kinship (expressed by three
tax classes) to the testator/donor and are divided into the following tax classes:
Tax class I
1. The spouse and civil partner;
2. the children and stepchildren;
3. the descendant of the children and stepchildren mentioned under lit. 2;
4. the parents and ancestors in the case of acquisition mortis causa.
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Tax class II
1. The parents and ancestors as they do not belong to tax class I;
2. the siblings;
3. the descendants of siblings in the first degree;
4. the stepparents;
5. the sons-in-law and daughters-in-law;
6. the parents-in-law;
7. the divorced spouse or the civil partner when the civil partnership has ended.
Tax class III
All other acquirers and specific-purpose transfers.
The following personal allowances apply relating to the various tax classes:
In the case of unlimited tax liability no taxes are raised for acquisitions of
1. the spouse and the civil partner in the amount of up to EUR 500,000;
2.the children within the meaning of tax class I No. 2 and the children of deceased children within the
meaning of tax class I No. 2 in the amount of up to EUR 400,000;
3. the children of the children within the meaning of tax class I No. 2 in the amount of up to EUR 200,000;
4. the remaining persons of tax class I in the amount of up to EUR 100,000;
5. the persons of tax class II in the amount of up to EUR 20,000;
6. the remaining persons of tax class III in the amount of up to EUR 20,000.
In the case of limited tax liability the personal allowance is replaced by an allowance of EUR 2,000.
Upon application of the acquirer, an acquisition of domestic assets will in total be treated as being subject
to unlimited tax liability if the testator at the time of death or the donor at the time the gift is effected or
the acquirer at the time the tax arises has his place of residence in a member state of the EU or the EEA.
However, if such an application is made, also each acquisition that occurs with the same person within ten
years before the acquisition and within ten years after the acquisition must be treated as being subject to
unlimited tax liability. The above regulation makes it possible for non-resident taxpayers from other EU or EEA
countries to be treated as being subject to unlimited tax liability. Thus, they can also benefit from the high
personal allowances.
1.10 Tax rates
The tax rate is progressive, i.e. the tax burden increases with increasing tax class and increasing value of the
acquisition. The assessment basis is always the taxable acquisition. The following tax rates apply depending
on tax class and degree of kinship:
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Value of the taxable acquisition up to and including EUR
Percentage in the tax class
I
II
III
75,000
7
15
30
300,000
11
20
30
600,000
15
25
30
6,000,000
19
30
30
13,000,000
23
35
50
26,000,000
27
40
50
above 26,000,000
30
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50
For the purposes of these progressive tax rates and the allowances in paragraph 1.9, all gifts received from
the same donor during the last ten years are aggregated. Tax paid on previous gifts is then credited against
the tax computed on the aggregate gifts. This aggregation also applies where a donee later receives an
inheritance upon death of the donor.
Double taxation can, for example, occur if the transfer of assets is subject to unlimited tax liability in the country
of residence of the testator or donor and simultaneously certain assets constitute domestic assets in the other
country and are subject to limited tax liability there. Double unlimited tax liability would be possible as well.
Foreign inheritance or gift tax will be offset according to national provisions if no double taxation agreement
exists in the field of inheritance/gift tax. The prerequisites for crediting foreign inheritance/gift tax against
German inheritance/gift tax are:
• taxpayer must file a corresponding application;
• unlimited tax liability has to apply;
• no double taxation agreement exists that actually excludes double taxation;
• foreign tax must correspond to the German inheritance/gift tax;
• foreign tax must have been assessed and paid for the foreign assets.
Setting-off is limited in time for cases in which the German tax arose within five years since the point of time
in which the foreign inheritance tax arose. The amount which can be offset is limited, such as only that part of
the foreign tax may be deducted which is due for the foreign assets which also are taxable in Germany. Thus,
double taxation is avoided, however the higher tax rate level of the countries involved will remain effective.
2.
Real Estate Transfer Tax (“RETT”)
The transfers of real estate located in Germany by inheritance or gift are as a matter of principle exempt from
RETT.
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3.
Wealth tax
Wealth tax was last raised in 1996. In 1995 the Federal Constitutional Court ruled that raising of different
taxes for real estate and other assets was not in conformity with the principle of equality. Hence, wealth tax
has not been raised anymore with effect from 1997 although the wealth tax law has remained in effect.
4.
The Federal Republic of Germany concluded bilateral double taxation agreements for inheritance tax and in
part also for gift tax only with a few countries. At present, extensive DTAs in the field of inheritance tax only
exist with
• Denmark;
• France;
• Greece;
• Sweden;
• Switzerland and
• the USA.
DTAs regularly use the tax credit method so as to avoid double taxation. The DTA with Denmark, Sweden
and France applies to both inheritance and gift taxes. The DTA USA applies to inheritance and gift taxes on
at state level. The DTA Switzerland only deals with cases of inheritance.
5.
5.1Expatriate
In certain cases expatriates are subject to income taxation in Germany although they moved away from
Germany (“extended limited tax liability”). This applies if
• the individual has been subject to unlimited income tax in Germany during at least five of the last ten
years before the exit;
• the individual becomes resident in a low-tax jurisdiction or has no residency in a foreign territory and
• essential economic interests exist in Germany.
Within the framework of extended limited tax liability, besides the domestic assets all other assets are taxed
whose revenues do not constitute foreign income under the principle of unlimited income tax liability.
In this case German inheritance/gift tax may even be due if the testator has, at the time of death, not moved
away from Germany at least ten years ago.
5.2
So called “taxable other income” includes the annuity payments from private pensions, company pension
plans and public pensions. Limited tax liability is triggered in Germany when annuity payments derive from
a domestic pension insurance institution or benefit facility. Hence, double taxation regularly occurs when a
pension beneficiary leaves the country and will be subject to unlimited tax liability on his worldwide income in
his new country of residence.
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Most German DTAs (following art. 18 of the model treaty of the OECD) assign the taxing right for pensions
and retirement benefits to the country of residence. In case the annuity payments derive from a social welfare
institution, most DTAs then shift the taxing right to the source country where the institution is seated. Further
pensions and similar payments can also be taxed in the source country when these payments have not been
any kind of taxable income for 15 years, derive from contributions which were tax deductible or have been
promoted by the public in any other manner.
5.3
Expatriation tax, especially in the case of a relevant share holding in a corporation
If essential participations in capital companies are sold, wherein the seller directly or indirectly holds a share
of at least one percent in the capital, the capital gains are subject to taxation (reduced assessment basis
60%). In the case of migration from Germany, the capital gains are taxed on a fictitious basis.
Beyond that, exit taxation may also result from numerous other circumstances, e.g. if the shares are
transferred to a non-resident taxpayer by acquisition mortis causa or by gift, if a taxpayer is regarded as
being resident abroad on the basis of DTA provisions, or if taxation of capital gains is limited or excluded in
Germany due to other events. In the case of cross-border matters relating to EU/EEA countries, the taxpayer
can apply for a deferral of tax for an indefinite period of time on grounds of European law. This deferral is not
possible in the case of migration in a third country or final disposition.
B.
Civil law
1.
A donation is considered as being a gift in the case the receiver is enriched by the assets from the donor
and both parties agree that the gift is free of charge. The view of both parties, whether it is a gift or not, is
decisive.
Generally, gifts have to be notarised. If this requirement is not met, this formal defect can be cured by later
actual performance of the promised service. Notarisation is no longer required if the gift has already been
transferred.
The gift may also be subject to a condition. Such conditions include incidental provisions which give the
donee at least a certain indirect influence regarding the further destiny of the gift or protect him with respect
to his and other dispositions of the gift. Additionally, entitlement may be in place to reclaim the gift or rights of
revocation as to provide protection against incident-induced risk situations.
2.
The right of succession is a constitutional right which protects dispositions of property in the perspective of
the own death. The freedom to set up a last will and the right of succession of relatives are laid down in the
constitutional law.
2.1
The entire assets existing when the testator deceases (“estate”) are subject of the order of succession. This
estate includes any assets such as rights in rem (belongings, property, liens) and debt claims as well as
any liabilities present at the time of death of the testator. According to German law the principle of universal
succession applies. According to that principle, each testator has one or several successors to whom his
entire assets are transferred at the time of his death.
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Any assets and liabilities are transferred uniformly and as a whole. According to German inheritance law,
universal succession takes place without participation of the successors or other intermediate third parties.
In this respect the principle of hereditary succession applies. The legal order of succession is based on the
idea of a postmortal responsibility of the testator for the members of his/her family and thus takes the form
of succession by relatives or spouses. If the testator has by the time of death not made a valid testamentary
disposition, his/her estate is transferred to his/her heirs at law.
The heir or heirs is/are the universal successor(s) of the testator. Any person, i.e. any natural or legal person,
may be designated as heir. Heirs at law include relatives and spouses or registered civil partners. Relatives
are understood to mean persons that descend from each other.
2.2
A testator may control his succession by making a will or a contract of inheritance. Any person having unlimited
legal competence may set up a last will. Testamentary dispositions always constitute personal legal transactions,
i.e. the testator must create them on his own. German inheritance law prescribes a certain form for wills, i.e. the
testator must set up the last will in a form defined in the German Civil Code so as to be effective.
2.3
2.3.1 Last will
A last will constitutes a unilateral universal disposition of the testator mortis causa. The last will may
comprise several types of forms and orders. The central type of order is the appointment of heirs. Further
forms include legacies, provisions for the execution of the last will and orders for the division of the estate.
In Germany spouses may jointly dispose on their assets. Joint last wills are similar to marriage contracts.
Generally, spouses rule that they will inherit each other’s property (“Berliner Testament”). Additionally it can
be determined that after the death of the surviving spouse the estate of both spouses is then transferred to a
third party (usually the children).
The testamentary contract is a legal transaction under which the testator concludes a contractual disposition
mortis causa in favor of the contracting partner or a third party. Testamentary contracts must always be
notarised. This contractual disposition is characterised by its binding effect.
2.4Legacy
The testator can provide a person with a pecuniary advantage/asset without appointing the person
becoming an heir (“legacy”). In contrast to the heir, the legatee does not become a universal successor. The
person just has a claim vis-a-vis the heirs to the asset dedicated to him. The legacy can be ordered in a last
will or a testamentary contract.
2.5Conditions
By instructing a condition a testator can safeguard a certain purpose. A condition can impose any
permissible action on a person aggrieved (mostly heirs or legatees). Typically a condition can include
instructions such as care for a certain related person. Further a condition could include a donation to a
beneficiary. But a condition does not grant a legal claim if somebody is a beneficiary of a condition. A
condition could be included in a last will, joint last will or a testamentary contract.
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2.6
Usufruct/retention of benefits
In order to protect oneself or another person in the case of a donation, e.g. gifts to children, the donor
may reserve the usufruct on certain parts of the assets for himself or other persons. The usufruct is
comprehensive and thus completely bars the owner from the use and possession of his asset. This
means that the usufructuary has the full right to the fruits, usage and advantages of use of the asset. For
example, the beneficiary may be entitled to continue to live in the real estate or rent the same. However, the
usufructuary is also obliged to maintain the economic condition of the property.
2.7
Testamentary dispositions are subject to certain form requirements. The most important type of testament
is the handwritten last will that is created by the testator himself in writing and signed. A last will may also
be recorded by a notary. Last wills of spouses may also be jointly set up by the spouses and are also valid
without involvement of a notary if the last will is written by hand and signed by both spouses. Testamentary
contracts can only be concluded in the presence of a notary.
2.8
According to German law, the testator’s estate is bound by the right to a statutory share. The statutory share
ensures that the next of kin receive a minimum share in the estate. The statutory share is half of the legal
distributive share. The statutory share always takes the form of a pecuniary claim according to the law of
obligations. Persons entitled to a statutory share always include the spouses and descendants that were
excluded from the inheritance by way of dispositions relating to inheritance law. The claim does not arise
before accrual of the inheritance. If the testator has not disinherited the person entitled to the statutory share,
but has burdened him by way of limitations and charges, the person entitled to the statutory share runs the
risk of finally obtaining less than the statutory share to which he is entitled. The calculation of the statutory
share is based on the actual value of estate to be assessed. In relation to third parties, the heir is the debtor
of the statutory share.
2.9
Family foundations do not serve common welfare, but pursue private and economic purposes. Thus, a family
foundation has a function relating to company law. Furthermore, family foundations offer tax advantages for
both the owner of the foundation and the family. In the case of a family foundation, a fictitious inheritance tax
liability recurs once in every 30-year period following the transfer of capital to the foundation.
In contrast to capital companies, partnerships or associations, a family foundation has neither members
nor shareholders. It rather consists of a conglomerate of assets and is regulated by a charter. Nevertheless,
a family foundation has legal capacity. It is managed by bodies specified in the charter, for example by an
executive board, and is supervised by a board of trustees.
Trusts, which are especially common in Anglo-Saxon law, do not exist under German law and are generally
not recognised in Germany.
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2.10 Execution of the last will
The testator may designate an executor in his last will. Normally, the executor is the person appointed by
the testator who (frequently as trustee) is to effect execution of the testamentary dispositions of the testator.
Execution of the testament is, for example, ordered so as to protect the will of the testator (e.g. with respect
to a legacy or a burden), protect the heirs from themselves (e.g. in the case of minors) and to simplify
administration and division of the inheritance (especially if there are several heirs).
3.
3.1
Law on succession
In order to assess all questions relating to inheritance law, the law on succession needs to be regarded.
German international inheritance law ties in with the law of testator’s home country. The time of death of the
testator needs to be taken into account. First of all, the nationality of the testator needs to be determined. If
the person has several nationalities, the effective nationality is the decisive one. The country with the effective
nationality is understood to mean that country, to which the foreigner having several nationalities has the
closest connection, especially due to his usual abode or his life history.
German inheritance law is based on the principle of unity of estate, i.e. the succession mortis causa shall in
principle be determined by a single legal system. An exception is made if special provisions apply for individual
objects according to the law of the place where the objects are located. For the sake of enforceability and the
proximity to the object, these provisions are given precedence to the law of succession applicable to the entire
estate. Frequently, special provisions exist for real property in the country where it is situated.
Under German law a foreign testator is only free to make a choice of the law on the applicable German law
of succession relating to real property that is situated in Germany. From the German point of view in all other
cases a choice of law could not be decisive but could be made merely declaratory if the choice complies
with the applicable rules of the law on succession.
If the inheritance laws of several states collide, German law stipulates that precedence is given to the law of
the country of which the testator was a national. This applies to the entire estate worldwide. However, the
principle of unity of estate may be suspended if, for example, dispositions are made of real property situated
abroad.
For German individuals staying abroad the succession mortis causa with respect to assets located abroad is
also determined by German law. This applies unless the law of the other country contains special provisions
for assets located under its sphere of control that are also applicable to German individuals. In such cases,
the law of succession is fragmented so as to guarantee international harmony of decisions.
In the case of such fragmented succession mortis causa the assets located in the respective foreign country
are determined by foreign law and for the remainder of the (worldwide located) assets by German law.
3.2
See general description as outlined on page 4 which also applies to Germany.
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India
A.
Tax law
1.
Inheritance tax
Inheritance tax, earlier known as estate duty tax in India, was abolished in the year 1985. Since then there is
no such tax on any property inherited by Indian nationals.
2.
Gift tax
With effect from October 1, 1998, the Gift Tax Act, 1958 was also abolished in India. Therefore, the act of
gifting/receiving a gift or inheritance under a will or otherwise to blood relatives does not attract any tax in India.
3.
Income Tax Act, 1961
However, the Income Tax Act, 1961 levies a tax in certain cases of gifts being received by non-related (i.e. those
who are not blood relatives) entities. The relevant provisions have been summarised in the following chart:
Property gifted
Criteria for taxability
Taxable income
For ceiling limit of INR
50,000** whether on a
single transaction or all
of the previous year
Any sum of money
(gift in cash/cheque/
draft other than loan)
Aggregate amount received
during the previous year
exceeds INR 50,000**
Whole of such
aggregate amount
All transactions
Immovable property
without consideration
Stamp duty value* of
property exceeds INR
50,000**
Stamp duty value
Single transaction
Immovable property
for a consideration
which is less than
stamp duty value
Consideration received
is less than the stamp
duty value by an amount
exceeding INR 50,000**
Difference between
stamp duty value and
the consideration
received
Single transaction
Movable property
without consideration
Aggregate fair market
value (“FMV”) of properties
received exceeds INR
50,000**
Whole of such
aggregate FMV
All transactions
Movable property for
consideration less
than FMV
Consideration received is
less than aggregate FMV by
an amount exceeding INR
50,000**
Difference between
the aggregate FMV
and the consideration
received
All transactions
*Stamp duty value means the value adopted or assessed or assessable by any authority of the central government or a state government
for the purpose of payment of stamp duty in respect of an immovable property. **Equivalent to USD 770 (approx.).
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4.
Stamp duty
In addition to the above, on registering a gift deed for an immovable property, a stamp duty shall be payable
as per the local state laws of the state in which the property is situated. The general rate is 5% of the
valuation adopted by the state authorities.
5.
Wealth tax
Budget 2015 announced that the levy of wealth tax is now completely removed from financial year 201516 onwards (i.e. from April 1, 2015). The loss of revenue due to the abolishment of wealth tax would be
compensated by the levy of additional surcharge on high income earning assessments.
6.
Currently India has active comprehensive double taxation avoidance agreement (“DTAs”) with 91 countries.
Since India does not have a separate inheritance tax or gift tax legislation, the applicability of such DTAs is
limited to the taxability of incomes and capital gains.
7.
7.1Expatriate
Expatriates coming to India or moving out of India on employment are taxed at par with Indian nationals.
Unlike many developed nations India does not tax individuals on the basis of their domicile/citizenship.
Taxability of individuals in India is determined on the basis of their residential status (“ordinary resident”/“not
ordinary resident”/“non-resident”) to be classified on the basis of the number of days of stay in India in the
relevant financial year (commencing April, 1 and ending on March, 31 of the following year) and the seven
immediately preceding years.
While non-residents and not ordinarily residents are liable to pay taxes only on India sourced incomes,
ordinary residents are liable to pay taxes in India on their global income, irrespective of the source of their
derivation/place of receipt.
The tax rates for individuals in India is determined on the basis of a progressive slab system, which currently
is as under:
Annual taxable income
(in INR)
Annual taxable income
(in approx. USD equivalents)
Applicable tax rate
(%)
Up to 250,000
Up to 3,850
Nil
250,001 to 500,000
3,850-7,690
10
500,001 to 1,000,000
7,690-15,385
20
Above 1,000,001
Above 15,385
30
Capital gains from alienation from properties is taxed at a flat rate of 10/15/20% depending upon certain
criterias to be met.
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7.2
Pension and retirement benefits arising to/received by expatriates, to the extent the same can be attributed
to their employment in India, are taxed in India as salary income.
Monthly pensions received from the pension fund after retirement is fully taxable. However, commutation of
pension payment shall be exempt from tax, subject to certain conditions.
Effective October 2008, India has notified social security schemes for international workers (“IW”), i.e. foreign
nationals travelling to India/Indian nationals travelling abroad for taking employment. So far India has signed
social security agreements (“SSAs”) with 18 countries, including France, Belgium, Denmark, Germany,
Luxembourg and Netherlands.
The benefit of having these SSAs is that nationals of these signatory countries travelling to/from India on
employment are exempted from making contributions to social security schemes in the country of their
employment, subject to the condition that such contributions shall be continued to be paid by them or their
employer in their country of origin.
In case of non-SSA countries, the expatriates travelling to India are under a mandatory requirement to get
registered with the Indian pension authorities, Employees Provident Fund Office (“EPFO”). Both the employer
as well as the expatriate are obligated to make a monthly contribution of 12% (each) to be computed on the
basis of the expatriate’s monthly salary.
An IW can withdraw his/her accumulated balance in the provident fund in the following circumstances:
a) on retirement from services in the establishment or after attaining 58 years of age, whichever is later;
b)on retirement on account of a permanent and total incapacity to work due to bodily or mental infirmity as
certified by a prescribed medical officer or registered practitioner;
c) when suffering from certain diseases detailed in the terms of the scheme;
d) on ceasing to be an employee of an covered establishment, where the IW is from an SSA country.
7.3Consequences of income tax, especially in the case of a relevant shareholding in a
corporation
Incomes in the form of profit distribution (“dividends”) is generally tax-exempt in India in the hands of the
shareholder. A profit distribution tax (“corporate dividend tax” or “CDT”) is levied on the same at a rate of
21% (approx.), payable by the corporation.
Incomes derived from the alienation of such shareholding is taxed as capital gains. The applicable tax rate
could range from 10-20% depending upon following factors, such as:
a) duration for which the asset has been held – different tax rates for long terms and short term assets;
b) classification of the corporation – listed or unlisted entity.
India has entered into DTAs with few countries such as Mauritius, Luxembourg, Cyprus, Singapore, etc.,
which vest the right of taxing such capital gains solely with the country of the seller’s residence.
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B.
Civil law
1.
Section 122 of the Transfer of Property Act postulates that a gift is a transfer of certain existing movable or
immovable property made voluntarily and without consideration by one person called the donor, to another,
called a donee and accepted by or on behalf of the donee.
As per section 123 of the Transfer of Property Act, a gift of immovable property cannot pass any title to the
donee unless it is registered. Attestation by two witnesses is required during registration and post registration
so that the title transfer is possible.
In order to constitute a valid gift, the pivotal requirement is the acceptance thereof during the lifetime
of the donor while he/she is still capable of giving. No particular mode of acceptance is required and
the circumstances throw light on that aspect. Factum of acceptance can be established by different
circumstances such as a donee taking a property or being in possession of the deed of gift alone. If a
document of gift is handed over to the donee by the donor after its execution or registration in favour of the
donee which he/she accepts, it amounts to be a valid acceptance of a gift in law. The specific recital in the
deed that possession is given raises a presumption of acceptance.
A minor therefore may be a donee; but if the gift is onerous, the obligation cannot be enforced against him/
her while he/she is a minor. But when he/she attains majority he/she must either accept the burden or return
the gift.
The conception of the term “gift” as used in the Transfer of Property Act is somewhat different from the use in
Mohammedan law. In the Mohammedan law a gift is a transfer of property or right by one person to another
in accordance with the provisions given in the Mohammedan law and includes
a)a hiba, an immediate and unconditional transfer of the ownership of some property or of some right,
without any consideration or with some return (“ewaz”); and
b) an ariat, the grant of some limited interest in respect of the use or usufruct of some property or right.
c)Where a gift of any property or right is made without consideration with the object of acquiring religious
merit, it is called “sadaqah”.
The terms “hiba” and “gift” are often indiscriminately used but the terms “hiba” is only one of the kinds of
transactions which are covered by the general term “gift”. A hiba is a transfer without consideration. A gift
by a Muslim in favour of his/her co-religionist must be under the Mohammedan law. A gift is not a contract
(though in Muslim law it is called a contract) but the principle may be applicable even to gift.
2.
The Constitution of India provides freedom of conscience (i.e. religious faith is a fundamental right). Thus,
there is no single, uniform code for civil law on the subject in India. Thus, the law to be applied would depend
upon the religion practised by the testator, i.e. the deceased.
The general law relating to inheritance and succession can be referred to in the Indian Succession Act, 1925.
The law on intestate (non-testamentary) succession for different communities in India is governed by different
succession laws applicable for that particular community. For instance, the Hindus, Jains, Sikhs & Budhists
are governed by the Hindu Succession Act, 1956. The Parsis, Christians and Jews fall under the Indian
Succession Act, 1925, while the Muslims with regard to non-testamentary succession are governed by the
Muslim Personal Law (“Shariat”) Application Act, 1937.
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The law on testate succession for all communities except Muslims is governed by the Indian Succession Act,
1925. The law in relation to the making of wills by Muslims is governed by the relevant Muslim Shariat Law as
applicable to the Shias and the Sunnis.
The applicable law is generally dependent on the religion practised by the deceased. However, in case of
residents of Goa irrespective of the religion of the deceased the Portuguese Civil Code of 1860 shall apply.
2.1
A.Under the Hindu Succession Act, 1956, the properties of a Hindu male (including
Buddhists, Sikh, Jain, and all those who are not Christian, Muslim or Parsi) dying
intestate devolves, as under:
1.Class I heirs:
a) mother being alive (1 share)
b) widow (1 share)
c) living sons (1 share each)
d) living daughters (1 share each)
e) predeceased son having the following relations (1 share)
i)widow
ii)sons
iii) daughters – each to be equally divided.
If a predeceased son of this predeceased son leaves a widow, the living sons and living daughters each
shall equally share the share of the predeceased son of the predeceased son who has one share with living
sons and daughters. The share of the predeceased daughter (1 share) is to be equally shared by sons and
daughters of the predeceased daughter.
2.In case there is none in the class I schedule, the property shall go to the class II based order,
which is as under:
Order I:
father (whole in the absence of anybody in class I)
Order II: son’s daughter’s son; son’s daughter’s daughter, brother, sister (all in equal proportion)
Order III: daughter’s son’s son, daughter’s son’s daughter, daughter’s daughter’s son, daughter’s
daughter’s daughter (equally)
Order IV: brother’s son, brother’s daughter, sister’s son and sister’s daughter
Order V: father’s father, father’s mother (equally)
Order VI: father’s widow, brother’s widow
Order VII: father’s brother, father’s sister
Order VIII: mother’s father, mother’s mother
Order IX: mother’s brother, mother’s sister.
The earlier order is preferred over the later, (i.e. if an earlier order is present, the later orders would not inherit).
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B.
If the deceased is a female Hindu dying intestate:
1 Class I:
a) sons (1 share each)
b) daughters (1 share each)
c) husband (1 share)
d) son and daughter of predeceased son (equally together 1 share)
e) son and daughter of predeceased daughter (equally together 1 share).
2. Class II:
Order I: heirs of husband
Order I:
father and mother
Order II: father’s heir
Order IV: heir’s of the mother.
C.
If the deceased is a Muslim
Muslim communities in India predominantly follow Hanafi law but in some locations they follow Shia law. The
share of each heir must be ascertained based on individual cases. The following are four classes of heirs and
successors, with provision of exclusion:
a)“Sharers” are those who are entitled to a prescribed share of inheritance. They are heirs by consanguinity
and collaterals. Consanguineous heirs are
i) agnets, like father, true grandfather, mother, and true grandmother;
ii) descendants, like daughter, son’s daughter and
iii)collaterals, like full sister, consanguine sister, uterine brother and uterine sister. Collateral heirs are heirs
by affinity, like husband and wife.
b) “ Residuaries” are those who are not entitled to a prescribed share but are entitled to take the residue
after the sharers take their prescribed shares. Children of the deceased or of the son of the deceased
and the father of the deceased are residuaries. Male descendants of the true grandfather are also
residuaries.
c)“Distant kindred” are all blood relations not being sharers or residuarie. If there are no sharers or
residuaries other than husband or wife the balance shall be given to distant kindred.
d)“Unrelated successors” are those who are acknowledged kinsman, universal legatee and government by
escheat. In the absence of relations, the acknowledged kinsman shall succeed. In the absence of any in
the group, it will go to universal legatee, and if there is none, the principle of escheat will apply.
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D.If the deceased is a Christian or married under the Special Marriage Act (for interreligious marriage):
a) where lineal descendant is present:
i) widow/widower – 1/3 of the property;
ii) lineal descendants – equally to share 2/3.
b) in the absence of lineal descendant, to all grand children, – equally;
c) in the absence of grandchildren, to great grant children – equally;
d)lineal descendant of a predeceased child or lineal descendant of a predeceased child of a predeceased
child if present – division is based on equal shares, taking the predeceased child to be alive, and a
downward distribution amongst the lineal descendants.
e) with no lineal descendant:
i) widow/widower – 1/3;
ii) father – balance entire;
iii) if the father is dead, to mother, sisters and brothers – equally;
iv)if the father is dead, to mother, living sisters and brothers, and children of a predeceased sister or
brother – equally so that one share to be taken for the predeceased sister or brother to pass through
the lineal descendant to such predeceased.
E.
If the deceased is a Parsi:
a)widow/widower;
b) children (equally);
c) living parents – each to get a share equal to half of a child;
d)wife and children of a predeceased son to share the share of the child as if the son died after the death
of the deceased. If the child predeceased is a daughter, her share would be equally distributed to her
children.
F.
Resident of Goa:
a) spouse only (one-half of estate);
b) the balance shall devolve upon the following:
i) descendants and spouse;
ii) ascendants and spouse;
iii)parents.
The statute provides detailed rules of distribution on case to case basis.
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2.2
India does not have forced heirship rules except under customary Muslim law and under Goan community
law.
A Hindu may dispose of by will or other testamentary disposition any property (including his/her share in
undivided coparcenary property), which is capable of being disposed of by him/her.
Muslim law has forced heirship rules under which Muslims are permitted to dispose only one-third of their
estate under a will. However, more than one-third may be bequeathed if all heirs agree to such disposal
either before the testator’s death (under Shia law) or after the testator’s death (under Sunni and Shia law).
Sharia-compliant trusts may be used to sidestep the limitation on testamentary disposition unless the
settlement is made in anticipation of death.
In case of residents of Goa, 50% of the estate devolve to the spouse automatically on death while the
other 50% devolve upon legal heirs. The rule of forced heirship in the Portuguese Civil Code is as follows: (i)
spouse only (one-half of estate); (ii) descendants and spouse (two-thirds); (iii) descendants only (one-half or
two-thirds, depending on the number of descendants), (iv) ascendants and spouse (two-thirds); (v) parents
only (one-half); and (vi) other ascendants only (one-third). The remainder is freely disposable.
2.3
A testament, or more popularly referred to as a will in India, is a legal declaration which defines the intention
of the testator, with respect to his/her property, which he/she desires to be carried into effect after his/her
death. The different types of wills are enlisted as under:
2.3.1 Conditional will
This is a will made so as to take effect only on a contingency. For example – the operation of the document
may be postponed until after the death of the testator’s wife.
2.3.2 Joint will
Two or more persons may make a joint will. It will take effect as if each has properly executed a will as
regards his/her own property. If a will is joint and is intended to take effect after the death of both, it will not
be admitted to probate during the lifetime of either.
2.3.3 Mutual will
A will is mutual when two testators confer on each other reciprocal benefits as by either of them constituting
the other his/her legatee, this is to say, when the executants fill the roles of both the testator and legatee
towards each other. Mutual wills are also called “reciprocal wills”.
2.3.4 Holograph will
A holograph is a will entirely in the handwriting of the testator. Naturally there is a greater guarantee of
genuineness attached to such a will. But in order to be valid it must also satisfy all the statutory requirements.
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2.3.5 Concurrent wills
The general rule is that a testator can leave only one will at the time of his/her death. But for the sake of
convenience a testator may dispose of some properties, e.g., those in one country by one will and those in
another country by another will. They may be treated as wholly independent of each other, unless there is
any inter-connection or the incorporation of one in the other. Such wills are called “concurrent wills”.
2.3.6 Duplicate will
A testator, for the sake of safety, may make a will in duplicate, one to be kept by him/her and the other
deposited in some safe custody with a bank, executor or trustee. Each copy must be duly signed and
attested in order to be valid. A valid revocation of the original would affect a valid revocation of the duplicate
also.
2.3.7 Onerous will
This is a will which imposes an obligation on the legatee that he/she gets nothing until he/she accepts it
completely.
Essentials of a will:
A will made by persons belonging to any religion, excepting Muslims, must meet the following conditions:
a) The will must be in writing made by a person who is a major, of sound mind and with free consent;
b)The will must be signed by the testator or by some other person in the testator’s presence and at his/her
direction;
c) The will must be attested by two or more persons;
d) The document must be a declaration of intent of the testator with respect to his/her property;
e) The document must specify that his/her intent should be carried out after the testator’s death;
f)There must be a disposition of property under the document. The will should clearly set out the properties
intended to be transferred and should also set out that the document has been executed without
coercion or undue influence.
g)A will must be dated; otherwise proof of the day on which the will was executed is to be given at the time
when the petition for probate is filed. The registration of a will is optional and no adverse inference can be
drawn against the will in case of non-registration.
A will can be made in favour of any person or class of persons. It cannot be made in favour of an unborn
child, i.e. one not born at the date of testator’s death. Under Muslim laws a bequest in favour of an unborn
person shall stand valid, if only the child is born within six months (under Sunni Law) or ten months (under
Shia law) of the date of making the will. Generally a testament in which the vesting of property is delayed
beyond the lifetime of one or more persons is generally not valid, excepting charitable cases.
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2.4Trust
The law relating to private trusts is governed by the Indian Trusts Act, 1882. A trust is basically a vehicle
under which property is transferred from the original owner and held by the person to whom it is transferred
for the benefit of another. The “author of the trust”, the “trustee”, the “beneficiary”, the “trust-property”, the
“beneficial interest” and the “instrument of trust” are the integral elements of a trust. A trust can be created
for any lawful purpose.
A trust, in relation to an immovable property, must be in writing and registered. A trust is created when the
author of the trust indicates an intention to create a trust along with its purpose, beneficiary and the trustproperty, and transfers the property to the trustee. A trust is different from a gift.
For income tax purposes, the trusts may be classified into the following three types:
a)“irrevocable determinate (specific) trust”, i.e. where the settlement made by the settlor is irrevocable and
the beneficiaries along with their respective shares are clearly identifiable.
In such cases, the trustee may be assessed as the representative assessee of the beneficiaries and be
taxed in a manner similar to as beneficiaries would have been taxed. On distribution of income to the
beneficiaries their shall be no additional tax liability.
b)“irrevocable discretionary trust”, i.e. where the settlement made by the settlor is revocable and the
beneficiaries along with their respective shares are not defined.
In such cases, the trustee may be assessed as the representative assessee of the beneficiaries and
be taxed at the maximum rate of 30%. On distribution of income to the beneficiaries their shall be no
additional tax liability.
c)“revocable trust” (revocable transfer of assets), i.e. one which can be revoked by its settlor at any point in
time. Any income arising to a person by virtue of a revocable transfer of asset is chargeable to tax as the
income of the transferor.
2.5
Execution of will
Probate is the process of proving and registering in the Supreme Court (Federal Court) the last will of a
deceased person.
Probate is mandatory where the testator is a Hindu, Sikh, Jain, Buddhist or Parsi and the will is:
a) executed in certain specified territories; or
b) executed outside those territories but relates to immoveable property located within such territories.
These territories are the cities of Calcutta, Chennai and Mumbai.
Probate is not mandatory where the testator is a Muslim or Indian Christian even if conditions (a) and (b)
above are satisfied.
Probate is essential because no right as executor or legatee can be established in any court unless the
relevant court has granted probate of the will under which the right is claimed.
However, a person who sets up a will which does not mandatorily have to be probated (as per the conditions
above) can establish his/her right without obtaining a probate. In such a case, obtaining of probate is
optional.
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Probate can only be granted to an executor appointed by will either expressly or by implication. When there
is more than one executor, probate must be granted to all those persons who have applied, unless those
who do not apply renounce their right as an executor. Probate will not be granted to minors, persons of
unsound mind, or to any association of individuals unless it is a company, which satisfies the rules prescribed
by the state government to be an executor.
An executor is a person who is appointed by the testator to execute his/her will. In other words, an executor
is duty bound to distribute the assets of the testator as per the provisions of his/her will.
All persons capable of executing wills can be executors. Even a minor can be appointed an executor of a
will, but a probate cannot be granted to the minor until he/she attains majority. A testator can appoint one or
more executors. The appointment of an executor may be absolute or for a limited purpose or limited time. An
executor as such does not derive any benefit under the will, unless specifically provided for.
3.
Testamentary succession in respect of moveable properties is governed by the law of the domicile of the
owner while succession to immoveable properties is governed by the law where the immovable property is
situated.
In India, domicile is important in cases of succession, whether testate or intestate. India generally follows
the English common laws. Domicile in India is generally determined by the place of birth of individuals and
may subsequently be changed by a conscious act of the individual. Indian law lays down a specific test for
“domicile of origin”, which may not be the same as the birth place of the individual.
Sections 6 to 18 of the Indian Succession Act, 1925 lay down some general principles as to domicile.
Section 7 provides that the “domicile of origin” of every legitimate child is the country where the father
was domiciled at the time of birth of the individual. Section 9 provides that the domicile of origin prevails
until a new domicile is acquired. Section 10 provides that a new domicile is acquired by “taking up... fixed
habitation” in a country other than the domicile of origin. “Fixed habitation” in this context does not mean
merely a fixed place of residence. The intention to acquire a new domicile, and the intention of residing in that
fixed habitation permanently (and not merely by way of employment etc.) is also relevant.
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Italy
A.
Tax law
1.
1.1
Taxable event
The inheritance and gift tax in Italy is now fundamentally ruled by Legislative Decree No. 346 dated October
31, 1990. Before its new introduction by Decree Law No. 262 dated October 3, 2006, the inheritance and
gift tax had been cancelled by Law No. 383 dated October 18, 2001, so that inheritance and gift tax did
not apply to situations occurring from 2002 up to September 2006. Inheritance occurred and finalised from
October 3, 2006 onward, as well as gifts occurred and notarised from November 29, 2006 onward are ruled
as follows.
The tax applies to any gratuitous acquisitions of assets and rights deriving from death (“mortis causa”) or
among the living (“inter vivos”). Among taxable acquisitions the following assets/rights have to be considered:
• the constitution of enjoyment rights;
• the renounce to real and/or to credit rights;
• the setting up of pensions and/or annuity.
Gift tax applies to:
• donations inter vivos;
• all further gratuitous acts;
• the constitution of destination restrictions onto assets in the interest of the acquirer who enriches at the
donor’s expenses.
In principle, the same provisions apply for gifts inter vivos as well as for acquisitions mortis causa.
Support and education expenses, expenses borne for illnesses, as well as ordinary ones for clothes or
wedding are not subject to taxation as clearly provided for by Italian Civil Code.
1.2
As a general rule, inheritance and gift tax is applied with reference to the whole goods and rights moved from
the death person (also referred to as “de cuius” hereinafter)/donor in favor of the heir/donee, even if goods
and rights are located abroad (principle of “global taxation” in case of de cuius’/donor’s Italian residence).
On the contrary, taxation is only limited to the value of goods and rights existing in Italy in case the death
person/donor was not resident in our country at the opening of the inheritance/donation (principle of
“territoriality” applied to non-Italian residents).
Generally, the heirs’/donee’s residence is not relevant, being only relevant the de cuius’/donor’s place of
residence, even if Italian law requires the registration in Italy of inheritance/donations finalised abroad (being
the de cuius/donor not an Italian resident) in favor of Italian resident heirs/donees.
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The citizenship of the de cuius/donor is not relevant as the Italian Civil Code only recognises the concepts of
residence and domicile, being residence the place of a person’s habitual abode; while domicile is the main
place of business and interests.
In any case, the following assets/rights are always considered existing, thus taxable, in Italy wherever the de
cuius’/donor’s residence is situated:
• assets/rights enrolled in Italian public registers (such as cars, crafts, real estates, trademarks and
copyrights) and the related enjoyment rights on them;
• participating shares or quotas in companies, or other entities different from companies, being in Italy their
legal offices or administration seats or objects of business;
• State bonds or those issued by Italian companies or by other Italian resident entities.
The application of the above mentioned principle of “global taxation” in case of de cuius’ Italian residence
could lead to a risk of double taxation for abroad assets/rights of the Italian resident de cuius at the opening
of the procedure, both according to the Italian fiscal rules and to those of the foreign country’s where abroad
assets/rights are situated.
1.3
Maturity of taxes
The opening of the procedure is in the day of death in case of inheritance and the day of the notarised
donation in case of acquisitions inter vivos.
1.4
The basis for the calculation of the inheritance tax is the whole net value of assets/rights transferred to each
of the heirs, which means the whole assets’/rights’ current value net from related deductible liabilities at the
opening of inheritance.
The basis for the calculation of the gift tax is the global value of assets/rights transferred to each of the
beneficiaries through the donation or the gratuitous event. From the positive global value of assets/rights
it is possible to deduct duties or charges related to the transferred assets/rights. For example, in case the
donor A transfers as a gift a real estate property currently and fairly valued EUR 100,000 in favor of the donee
B together with the duty for B to bear and pay a mortgage loan onto the same real estate property, it is
possible for B to deduct the amount of the mortgage loan from the taxable basis of the gift tax, that is from
the value of the real estate property.
1.5
Rules of valuation
Unless otherwise stated by law, the taxable base is generally equal to the market value of the property
transferred to each beneficiary.
In case of assets’ full property’s transfer in favor of heirs/donee, generally the valuation assumed at the
opening of the procedure is the current market value, that is the current price that would be achieved in the
ordinary course of business according to the condition of the economic asset, if it is sold individually.
As far as the value of real estate properties, it is not necessary to consider their market value, but it is
enough – to be prevented from any Tax Authorities’ issues – to consider their lower cadastral value. In Italy,
real estate properties are registered at the Cadastral Office with attribution of a cadastral income according
to their specific characteristics. To determine the cadastral value of real estate properties, alternative to their
market value, it is necessary:
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• to start from the attributed cadastral income;
• then to increase the above attributed cadastral income of (1) 25% in case of no buildable land and (2) of
5% in case of apartments;
• then to apply to the above results specific multipliers according to the nature of the real estate property,
that is: (a) multiplier 90 for no building land and (b) multiplier 120 for apartments, reduced to 110 in case
the apartment is the beneficiary’s home.
For buildable land it is not possible to use the cadastral valuation, being their current market value the only
allowed base of calculation for inheritance/gift tax.
In case of business transfer, the taxable base is the whole value of its assets and rights net from its debts
and liabilities as entered in the last certified inventory, if any. In case the entrepreneur is not obliged to
inventory, inheritance/gift taxation is applied to the current market value of all assets and liabilities included
in the business and an ad hoc inventory or list of goods, assets, rights, duties and liabilities is highly
recommended as an annex to the inheritance/gift declaration. Goodwill is never computable.
In case of participation shares or quotas, the value taxed depends on their listing or not at the Italian Stock
Exchange or other regulated financial markets; the value of listed shares is the average price of the last
quarter before the opening of the inheritance/gift. For not listed shares/quotas, the value is the corresponding
percentage of participation onto the business’s net equity as it is shown in the last approved and official
balance sheet. In case of no balance sheet or inventory, the value of shares/quotas is calculated in
proportion to the participation onto the whole complex of assets net from the business’s liabilities and, again,
without considering the goodwill.
As a general rule, duties and liabilities can be deducted only if they existed before the opening of the
procedure and resulted from written agreements with certain date before the occurring of the inheritance/gift
or if their existence is proved by a definitive jurisdictional decision.
For inheritance tax purpose, the heir is allowed to deduct medical and surgery expenses at the following
conditions:
• they are related to the last 6 months before the de cuius’ death;
• they are proved by bills and receipts dated before the opening of the inheritance.
Furthermore, funeral expenses borne by heirs and duly proved by receipt can be deducted in the limit of
EUR 1,032.91.
1.6
Tax exemptions
There are extensive tax exemptions, both for inheritance and for gift, according to various types of transfers,
such as:
• transfers in favor of state, region, municipality and other public institutions;
• transfers in favor of legally recognised associations and foundations having exclusively assistance, study,
scientific research, educational and other public benefit’s scopes;
• transfers in favor of bank foundations;
• transfers in favor of political parties;
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• transfers of businesses, branches, shares or quotas only in favor of the cuius’/donee’s spouse and direct
descendants and at the condition quotas/shares guarantee the company’s control and the heirs/donees
undertake to keep the control and/or to carry on the business for a retention period of no less than five
years;
• transfers of assets and of real estate properties in favor of young agricultural entrepreneurs aged no more
than 40 years, enrolled at social security assistance as professional farmers and at the condition they
directly till the land for at least six years.
1.7
Personal allowances
Both in case of inheritance and in case of donation, acquirers – as the charged parties – may be granted
personal allowances depending on the degree of kinship to the de cuius/donor, as listed in the below lines:
• EUR 1,000,000 for each heir/donee, in case of inheritance/donation in favor of the spouse or of direct
descendants/ancestors (children, parents and grandchildren);
• EUR 100,000 for each heir/donee, in case of inheritance/donation in favor of sisters and brothers;
• EUR 1,500,000 for each heir/donee, in case of inheritance/donation in favor of disabled beneficiaries, no
matter what degree of kinship to the de cuius/donor is in force.
If the whole inheritance/donation assets less the deductible liabilities are lower than the above allowances, no
inheritance/gift tax is payable; in case the whole assets net from the deductible liabilities exceed the above
allowances, inheritance/gift tax is calculated on the exceeding amounts.
As clarified by Italian Tax Authorities (see Ministerial Memorandum No. 3 dated January 22, 2008), the
allowance for disabled heirs/donees cannot be drawn concurrently with the further above allowances; that
means if the disabled heir/donee is the de cuius’/donor’s son, only the more favorable allowance of EUR
1,500,000 is granted with no possibility to head up also the allowance of EUR 1,000,000.
In case of real estate properties among the inheritance/donation assets, even if their taxable value does
not exceed the above allowances so that no inheritance/gift tax is due, the mortgage and cadastral taxes,
respectively at 2% and 1% are due as well. They are due for the enrollment of the real estates’ transfer
into the cadastral and properties’ registers; this total 3% is calculated onto the properties’ cadastral value,
determined as deschribed in detail above in paragraph 1.5.
In case the object of inheritance/gift is an apartment to be used as the heir’s/donee’s home, instead of
proportional mortgage and cadastral taxes at 3%, fixed EUR 200 as mortgage tax and EUR 200 as cadastral
tax are due.
1.8
Tax rates
The tax rate is proportional, with three different percentages provided for different heirs’/donee’s degree of
kinship to the de cuius/donor, as follows:
• rate of 4% to be applied onto the whole assets net from liabilities exceeding the allowance of EUR
1,000,000 per heir/donee in case of inheritance/donation in favor of the spouse or of direct descendants/
ancestors (children, parents and grandchildren);
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• rate of 6%, to be applied onto the whole assets net from liabilities exceeding the allowance of EUR
100,000 per heir/donee in case of inheritance/donation in favor of brothers and sisters; this is also the
rate applied – with no allowance – to inheritance/donation in favor of other relatives up to the fourth
degree and in favor of kinsman up to the third degree;
• rate of 8% to be applied – with no allowance – to inheritance/donation in favor of other people with no
kinship to the de cuius/donor.
• In case the object of inheritance/gift is an asset/real estate property of certified historical and artistical
value, as duly and officially recognised by Departments of Education and/or of Cultural Assets, tax is due
at the fixed amount of EUR 200.
• In case the inheritance/gift assets are instrumental and useful for carrying on an agricultural business, tax
is due at the fixed amount of EUR 200 if beneficiaries are young farmers, aged not more than 40 years
and duly enrolled in the farmers’ social security assistance or about to enroll in it within 3 years further to
the transfer.
2.
Wealth tax
2.1
Wealth tax on real estate properties
Property owners, both resident and not resident, are liable for a Real Estate Property Tax (“IMU”) on buildings
and lands owned in Italy both for their own use and/or for investment purposes. The basic tax rate is 0.76%,
but competent municipalities (that where the estate property is located) can provide for an increase or a
decrease of up to 0.3% on the basic rate. Generally IMU is not due on real estate flats used as the owner’s
home, meaning with home the apartment where the owner and his family both reside and have their habitual
abode; if one of these conditions is not verified, IMU exemption is not allowed. In case the owner’s home
is a luxury real estate property, that is an exclusive house, a town house or a castle, IMU exemption is not
allowed, but in this case IMU is due at the basic rate of 0.4%, possibly increased or decreased up to 0.2%
by the competent municipality.
Starting from year 2015, it is presumed to be used as home and, thus IMU exempted, the sole Italian flat
owned by Italian citizens not resident in our country but enrolled in the so called “AIRE” (that is a list of
persons resident abroad), officially retired by work in their respective countries of residence, at the condition
the Italian apartment is not let or given to someone else in commodate for use.
The above rates are applied onto the taxable value which is calculated starting from the real estates’
cadastral value, increasing it of 5% in case of apartments and then applying to the obtained result different
multipliers according to the cadastral category which the real estate property belongs to, being the more
common:
• multiplier 160 for houses, apartments and related fixtures, such as garages and basements;
• multiplier 80 for instrumental estate properties used as offices and professional firms’ seats.
The taxable value as above is reduced of 50%:
• in case of real estate properties’ historical and artistical value, as officially recognised by Departments of
Education and/or of Cultural Assets;
• in case of condemned and/or uninhabitable estate properties.
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Since 2014, IMU has been the main part of the so called “IUC”. This is a three heads tax onto real estate
properties including – in addition to IMU – also two service taxes, such as:
• “TASI”, a tax to be paid to competent municipalities for indivisible services as public lightening of roads,
maintenance of public gardens and streets. It is calculated on the same IMU’s taxable value at rates
differently decided upon by competent municipalities and varying: from (a) 0.00% up to a maximum of
0.08% for real estate properties different from the owner’s home and (b) from 0.25% up to a maximum of
0.33% for the owner’s home (generally IMU exempted). According to a percentage varying from 10% to
30%, decided upon by the competent municipalities, part of TASI is charged onto real estates’ tenants,
rather than on owners.
• “TARI”, a service tax on waste.
Italian Government is planning to cancel IMU and TASI only onto homes, as well as the quota of TASI onto
tenants’ shoulders in case of flats used by them as their homes, starting from next year 2016, as discussed
in Italian 2016 Financial Law issued by the Government in the meeting of past October 15, 2015.
Italian resident people, owners of real estate properties abroad or having on them real enjoyment rights, are
liable to wealth tax on foreign estate properties (“IVIE”). The taxable base is the cadastral value calculated
abroad as the taxable base of foreign patrimonial or income taxes on the same estate property, in case it
is located in EU member States plus Norway and Iceland; in case there is no cadastral value abroad and/
or if the estate properties are located outside EU member States, the taxable base is the purchase cost or
the property’s current market value. The basic rate is 0.76% and an allowance of EUR 200 is granted, to be
divided in percentage in case of different owners.
Only if foreign estate property is used as home and only for the period of its destination as the owner’s home
(such as for time job reasons abroad), tax rate to be applied is 0.4% with a granted deduction of EUR 200.
A tax credit up to the amount of the Italian real estate tax to be paid is granted in case of a corresponding
foreign patrimonial tax definitively paid abroad on the same real estate property.
2.2 Wealth tax on financial assets
Italian resident people, owners of bank and deposit accounts at Italian as well as at foreign banks and
financial institutions are subject to a stamp duty amounting to at least EUR 34.20 per year and per account,
in case each average annual consistency is higher than EUR 5,000.
On financial investments and assets abroad, such as: shares, bonds, foreign participation quotas and other
stocks different from shares, foreign life and insurance policies, the annual stamp duty to be paid is at 0.2%
calculated on each financial asset’s average annual consistency.
3.
Italy concluded bilateral double taxation agreements (“DTAs”) for inheritance tax only with a few countries as
listed below:
• Israel;
• Denmark;
• Greece;
• United Kingdom and Northern Ireland;
• Sweden;
• the USA.
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Most DTAs (except for those between Italy and France, UK and the USA) provide that assets are subject to
taxation in the state where assets are situated if the state of the deceased’s residence is different to the state
where the assets are situated; in case of concurrent taxation in different states, the inheritance tax definitively
paid in the country where such assets are situated is deductable as a tax credit in the other country.
No DTA is in force for gift tax, except for that between Italy and France.
4.
4.1
The taxation of pension and/or retirement benefits paid to Italian residents by foreign institutions is mostly
ruled by DTAs. The treatment is different if the pension/retirement benefit is paid by a private foreign
institution for industrial and business services rendered abroad or by public entities for institutional charges
rendered abroad.
While private foreign pensions (following art. 18 of the OECD model) are mostly taxed only in Italy, being our
country the state of the beneficiary’s residence; foreign public pensions are not exclusively taxed in Italy as
the state of the beneficiary’s residence, but in some cases they can be taxed only in the State of source if:
• the Italian resident beneficiary is not of Italian nationality (see art. 19 DTAs with Argentine; UK; Spain;
USA; Venezuela);
• or in case the Italian resident beneficiary is (also) of foreign nationality (see art. 19 DTAs with Belgium;
Germany; France; Switzerland).
In some cases (see DTAs with France; Finland; Luxembourg; Sweden) taxation is not exclusively, but
concurrently in two states, i.e. social securities’ and inabilities’ pensions are both taxed in the state of source
and in the state of the beneficiary’s residence. In case of concurrent taxation, the Italian resident is entitled to
claim a tax credit for the amount of taxes already and definitively paid in the state of source.
4.2Consequences of income tax, especially in the case of a relevant share holding in a
corporation
In Italy capital gains are taxed differently according to the eligibility or not of the owned participation. Eligible
participations are shares, quotas and similar titles which grant the owner:
• the exercise of more than 20% of the voting rights in the participated corporation’s ordinary meeting; or
• more than 25% ownership of the corporation’s/partnership’s registered stock or net equity.
In case of listed shares at the Italian Stock Exchange or at other regulated markets, eligible participations are
those granting the owner:
• the exercise of more than 2% of the voting rights in the participated corporation’s ordinary meeting; or
• more than 5% ownership of the corporation’s registered stock or net equity.
Capital gains made on eligible participations are taxable in the limit of 49.72% of their amount net from
capital losses; capital gains onto not eligible participations are subject to a tax of 26% of their amount with
no possibility to deduct losses. Generally, inheritance and gifts with respect to businesses and share holdings
are not considered events generating taxable capital gains in Italy especially if the continuity of business
values is verified from the de cuius/donor to the heirs/donees.
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Taxation in Italy is provided for capital gains made by non-Italian residents transferring against payment their
eligible shares/quotas into Italian resident companies. No taxation of capital gains is allowed only in case
of not eligible participations in Italian resident companies represented by listed shares at the Italian Stock
Exchange or other regulated market, wherever owned.
Taxation of capital gains must also match with DTA rules, which restrict the force of the national laws, in case
more favorable provisions exist. The most DTAs between Italy and other countries, (following art. 13 of the
OECD model) provide that capital gains are taxed only in the state of the alienator’s residence; if the alienated
shares derive more than 50% of their value – directly or indirectly – from immovable properties situated in
another contracting state, capital gains arising may be taxed in that other State.
B.
Civil law
Prepared in collaboration with Notary Public’s Firm Giovanni Giuliani – Vittorio Occorsio.
1.
The donation is an act by which the donor enriches the donee without consideration in return, but for liberal
spirit. All assets and rights can be donated except for future goods, as the donor must be well aware of the
value and the consistency of the assets and rights donated.
Only those who have the full ability to dispose of assets can make a donation. Therefore, minors,
incapacitated and interdicted persons as well as persons subject to administrative support are unable to
donate (even if by representative).
The donation is a very personal act, therefore the mandate to gift is not valid. The donation must be made by
public deed received by the notary in the presence of two witnesses, under penalty of nullity. The donation
concerning movables has also to describe goods in details and show the value of the donation in the same
gift deed or in an annexed document, always under penalty of nullity. Only donations of moderate value can
derogate from this requirement of form, as long as the delivery was made. The donation may be subject to
terms and conditions, and may be burdened by a liability put onto the donee’s shoulders.
Donation due to death (“donatio mortis causa”), with effect after the donor’s death and the possibility for the
donor to freely revoke it before death is not allowed by the Italian Civil Code. The donation indicating the donor’s
death as the initial term or as a postponement condition is allowed, since the donation is irrevocable and the
donor makes an immediate allocation and the donee is entitled to an expectation of rights at the same time.
Another type of donation is the “donatio de residuo”, i.e. the donation which is referred to the goods that are
not in the donor’s assets at the time of contract but which will be a residual in the donor’s assets at the time
of death. The donation in this case is an award mortis causa – that is reserved to a will instead – because it
has its source in the donor’s death which determines that the assets to be attributed are the residual assets
of the predeceased.
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2.
There are two types of succession:
• the legal succession, i.e. a succession without a last will: if the de cuius did not make a valid will or,
despite having made it, he did not dispose of his entire estate;
• and the inheritance, in case of a duly made last will.
2.1
Legal succession – devolved by law – is only applicable if there is not a valid will or if the de cuius’ will does
not dispose of the whole estate of the deceased. The law reserves quotas (statutory shares) for certain
relatives who cannot be deprived by the will of the deceased, both in case he decided by will and in case
he decided during lifetime by donations. As a consequence, the deceased can only freely dispose of the
available share, exceeding the statutory one reserved by law.
2.2
The testator can dispose of the whole of his assets or of part of them by making a last will, which after his
death has to be read publicly under a notary. The ability to make a will is up to those who are more than 18
years old, are not interdicted and in any case are capable of understanding and willing. A person under a
sentence of incapacitation can validly dispose by will, without any assistance by the curator.
2.3
2.3.1 Last will
Testamentary dispositions may be universal and attribute the status of heir, when they allocate the universality
or a share of all assets owned by the testator. A heir who inherits universally and with no limitations regarding
liabilities under inheritance replaces the de cuius, being responsible for the inheritance debts and liabilities
also with his own assets. Heirs are required to accept the inheritance, expressly or tacitly.
Owing to the fact that the heir is also liable with his own assets for debts under inheritance, and in order to
avoid that the heir is forced to renounce, the so-called “acceptance with the benefit of inventory” has been
set up: it is a formalised procedure that provides for the implementation of an inventory and its storing at the
Registry of the Court – under which the heir may avoid confusions of his own assets with those deriving from
the inheritance and, thus, holds them separately.
In Italy inheritance contracts are not allowed; therefore, it is not possible to conclude an agreement by
which a living person disciplines his succession with the consent of the potential heirs. The only legal tool
to dispose about our own estate is the testament for which the law sets up very specific requirements for
validity. The only exception to the prohibition of inheritance contracts is represented by family pacts, under
which the entrepreneur/the holder of company shares may transfer all or part of his business/shares to one
or more descendants.
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2.4Legacy
If the testator wants to provide a person with a pecuniary advantage without appointing him as an heir,
he may do that by giving him a legacy. In contrast to the heir, the legatee does not become a universal
successor. Legacy does not require acceptance, being also provided for the legatee the chance of a refusal.
The legatee is not liable with his own assets for debts under the succession except within the limits of value
of the assets under legacy. The legacy may involve either an asset or a right of the testator, as well as a third
party’s good or right; in these case, the legatee is entitled to require the heirs to fulfill the legacy.
2.5Conditions
If a testator wants to designate a person without granting him/her a claim to the benefit, the testator may do
so in form of a testamentary burden. The burden does not establish a legal claim of the beneficiary against
the heirs. The burden may only be imposed by means of a will. A burden may be any obligation to perform a
service or to provide an asset. The persons entitled to execution may then demand and, if needed, enforce
the execution of the burden by legal action.
2.6Usufruct
In order to protect oneself or the spouse in the case of gifts, e.g. gifts to children, the donor may reserve the
usufruct on certain parts of the assets for himself or other persons. The usufruct is comprehensive and thus
completely bars the owner from the use and possession of such object. This means that the usufructuary
has the full right to the fruits, the usage and the advantages of use of the object. For example, he may be
entitled to continue to live in the real estate or rent the same. However, the usufructuary is obliged to maintain
the economic condition of the property as well as he/she is the only tax obligor in Italy.
2.7
Italian law does not allow the oral testament: the will can only be written. Different forms provided for are:
• the “public will” under a notary public: it can only be drawn up, in the presence of two witnesses, directly
by the notary who shall interpret and prepare the will of the testator in the best way;
• the “holographic will”, which is written by the same testator’s hand, without the assistance of the notary
(who will only take part after the testator’s death for the “publication of the will”);
• the “secret will”, which is partly a testator’s and partly a notary’s act; in this case the notary is bound to
follow a very formal procedure (such as putting of sealing wax, etc.) to guarantee privacy and secret.
2.8
In the table below, please find the total shares (Law Succession) in case of no will and – in case of the de
cuius’ will – the statutory shares reserved by law and the exceeding available shares the testator can freely
dispose of, according to different heirs involved:
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Heirs
Law Succession
Statutory Shares
Available Shares
Spouse without children
100%
50%
50%
1 child without spouse
100%
50%
50%
2 or more children
100% equally
66.66% equally
33.33%
Spouse + 1 child
50% to spouse
50% to child
33.33% to spouse
33.33% to child
33.33%
Spouse + 2 or more
children
33.33% to spouse
66.66% to children equally
25% to spouse
50% to children equally
25%
Ancestors (without
spouse or children)
100% if parents, other
rules if not parents
33.33%
66.66%
If an heir, having by law the right to a statutory share is deprived of it by the de cuius, as a result of his/her
testamentary disposition and/or of past donations carried on, he/she can assert his/her right to the whole
statutory share by means of a special judicial action, so called “decreasing action”, to be finalised within 10
years from the opening of the succession, and may ask to those who benefited and their successors (third
purchasers) to pay back the amount needed to reintegrate it (“action for restitution”).
2.9
Notwithstanding the prohibition of inheritance contracts, in 2006 (see Law No. 55 issued on February 14,
2006 adding articles from 768 bis to 768 octies to the Italian Civil Code) the so-called “family pact” was
introduced. This is a contract by which – in line with the provisions on family businesses and respecting the
different companies’ juridical forms – the entrepreneur transfers, in whole or in part, the company, as well as
the holder of equity investments transfers, in whole or in part, its shares, to one or more descendants. The
grantee must reimburse the other heirs the value of their shares. Family pacts must be drawn up by public
act under penalty of nullity and all heirs entitled to statutory shares have to join as if at that moment the
entrepreneur’s/shareholder’s succession would start.
The institution of “trust” is similar to the family pact. In Italy, Law No. 364 issued on October 16, 1989, ratified
the Hague Convention on Trusts of July 1, 1985. Therefore, the relevant rules on trusts refer to the provisions
of the before mentioned Convention. However, since, under article 11 of the Convention, contracting
states are obliged to recognise the trust set-up in accordance with the law chosen by the settler, due to
the absence of specific regulations governing the trust in Italy, its constitution often refers to foreign laws
(especially Anglo-Saxon, Jersey, Man, Spanish ones, etc.). It is set-up allocating and securing the settler’s
assets to be managed by the trustee in one or more beneficiaries’ interest (identified or not) or for a particular
agreed scope.
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The testator may designate an executor in his/her will. Normally, the executor is the person appointed by
the testator who (frequently as trustee) is to effect execution of the testamentary dispositions of the testator.
Execution of the testament is, for example, ordered so as to
• protect the will of the testator (e.g. with respect to a legacy or a burden);
• protect the heirs from themselves (e.g. in the case of minors);
• simplify administration and division of the inheritance (especially if there are several heirs).
3.
3.1
Law on succession
In Italy, before the coming into force of the recent EU Regulation on succession starting from past August 17,
2015 transnational aspects were governed by art. 46 of Law No. 218 dated 1995 (still applied in all cases
not covered by the EU Regulation), which provided that the succession was regulated by the national law of
the person who inherited, at the time of death (the criterion is the reverse with what is set-up now by the EU
Regulation: the law of the de cuius’ nationality rather than the country of his/her habitual residence).
At the same time, the person whose inheritance is dealt with may submit, by a statement in the form of a
will (the so called “professio juris”), the whole succession under the law of the state where he resides. The
choice has no effect if at death the de cuius no longer resided in that state. In case of succession of an Italian
citizen, the choice does not affect the rights the Italian law attributes to Italian legal heirs resident in Italy at
the time of death of the person whose estate is dealt with.
3.2
See general description as outlined on page 4 which also applies to Italy.
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Malta
A.
Tax law
1.
Malta does not charge any inheritance or gift tax. However, generally any capital gains derived from the
transfer (including a donation) and the assignment or cession of any rights over any securities, business,
goodwill, business permits, beneficial interest in a trust, copyrights, patents, trademarks and trade-names
and any other intellectual property are charged to income tax. No income tax applies with respect to
transmissions “causa mortis” (by way of inheritance). However donations “inter vivos” are considered to be a
transfer and are generally charged to income tax on the capital gains derived by considering the donation as
a deemed sale made at the market value of the asset at the time of transfer. Although donations are generally
taxable, no tax shall be payable when the donation is made by a person to certain close relatives and certain
philanthropic institutions (see paragraph 4.4 and by cross reference – paragraph 3.4 below).
On the other hand, real estate transfer tax (“RETT”) is chargeable on the transfer (also including a donation)
of the ownership or usufruct of any immovable property or the assignment or cession of any rights over such
property. The exemptions applicable for donations for the purposes of capital gains (described above) also
apply for RETT (see paragraph 3.4 below).
Duty on documents and transfers is also charged on transfers of immovable property or any real right over
an immovable and on the transfer of marketable securities (including shares in a company). As a general
rule transmissions causa mortis are not exempt from duty on documents and transfers however certain
exceptions may apply (see paragraph 5.5 below).
2.
Wealth tax
Malta does not charge any wealth tax however donations (with the exception of certain donations to close
family members that satisfy certain conditions) and transfers of certain assets (including immovable property
and shares) may be chargeable to RETT, income tax on capital gains and duty on documents (see sections
3, 4 and 5 below).
3.RETT
3.1
Taxable event
The Income Tax Act (Cap. 123 of the Laws of Malta) (“ITA”) provides that any transfer of the ownership or
usufruct of any immovable property or the assignment or cession of any rights over such property shall be
charged to RETT – a final tax at the rates provided therein (see paragraph 3.3 below). As outlined in section
1 above, a donation is considered to be a transfer for the purposes of RETT and in such a transaction the
donation shall be considered as a deemed sale made at the market value of the property at the time of
transfer. Exemptions apply for certain transfers, including donations to persons specifically provided for
in the ITA (see paragraph 3.4 below).
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3.2
Tax liability/taxable persons
A transfer of immovable property situated in Malta and/or of any right over such property is subject to RETT
(subject to certain exemptions as described in paragraph 3.4 below). The transferor is charged to such tax
irrespectively of such person’s status (residence, domicile and nationality) if such immovable property and/or
right over such property is situated in Malta.
3.3
Tax rates
Subject to certain conditions RETT is generally charged at the rate of 8% of the transfer value however
any transfers of immovable property acquired before January 1, 2004 are taxed at the rate of 10% of the
transfer value. The reduced rate of 5% applies for transfers of immovable properties that are made not
later than 5 years from the date of their acquisition and do not form part of a project. Transfers of certain
restored properties that satisfy specific criteria may also benefit from the tax rate of 5%. Such rates apply
irrespectively as to whether the transferor is an individual or a legal person (e.g. a company).
The reduced rate of 2% applies for transfers of any property which was owned by an individual or co-owned
by individuals that had acquired the immovable property in order to establish his or their sole ordinary
residence therein and such transfer is made not later than three years after the date of the acquisition thereof,
subject to the satisfaction of certain conditions. Specific rules apply with respect to transfers of immovable
property that was acquired by way of inheritance. Properties that were inherited are subject to a final tax at
the rate of 12% on the difference between the transfer value and the cost of acquisition. However if such
property was inherited before November 25, 1992 the tax rate is reduced to 7% on such difference.
3.4
Exemptions from RETT
The following transfers are exempt from RETT:
• a donation made by a person to:
–his spouse, descendants and ascendants in the direct line and their relative spouses, or in the
absence of descendants to his brothers or sisters and their descendants; or
– philanthropic institutions specifically approved in terms of the ITA;
• a transfer of a property that has been owned and occupied by the transferor as his main residence for a
period of at least three consecutive years immediately preceding the date of transfer and provided that
the property is disposed of within twelve months of vacating the premises and that certain conditions (as
may be applicable) are satisfied;
• the assignment of property between spouses consequent to a judicial or consensual separation or a
divorce;
• the assignment of property that formed part of the community of acquests between the spouses or was
otherwise owned in common between them, to one of the spouses on the dissolution of the community,
or the partition of such property between the spouses or the surviving spouse and the heirs of the
deceased spouse;
• a transfer of property from one company to another which would qualify for the intra-group exemption in
terms of the specific provisions under the ITA;
• the transfer of property upon the incorporation of a business or a partnership “en nom collectif” as a
going concern into a limited liability company – subject to certain conditions;
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• the settlement of property on trust, or the distribution or reversion of property settled on trust, or the
transfer of all the property of a trust involving only a change in the trustee of a trust and where there is no
change in the beneficiaries or in the beneficial interest;
• a transfer of property by a company to its shareholder or to an individual related to its shareholder in the
course of winding up where the said shareholder is an individual or his spouse, who owns or own, directly
or indirectly, not less than 95% of the share capital and voting rights of the said company transferring the
property as aforesaid.
3.5
Opt-out from RETT
In certain circumstances the transferor of the ownership or usufruct of any immovable property or the
assignment or cession of any rights over such property may elect to opt out of RETT. In such circumstances
the transfer will not be subject to RETT however such transfer may then be charged to capital gains
(if applicable in terms of the ITA).
The cases where an election to opt out from RETT may still be made include:
(a)a transfer of property that was, immediately before the transfer, co-owned by two individuals and the
transfer is made by one of the co-owners to the other;
(b) a transfer made by means of a judicial sale by auction or in the course of a winding up by the court;
(c)a transfer of property that had been used in a business for a period of at least three years and that is
replaced within one year by property used solely for a similar purpose of the business;
(d) a transfer of property is made by a person who is not resident in Malta;
(e)a transfer of property forming part of a project by a company which has issued debt securities to the
public and such debt securities are listed on a stock exchange recognised in terms of Maltese law.
4.
Income tax on capital gains
4.1
Taxable event
The ITA charges capital gains derived by a person from the transfer (including a donation) of a capital asset
at the rates applicable in terms of the rules therein (see paragraph 4.3 below). Any person chargeable to
income tax on capital gains in terms of the jurisdictional rules of the ITA (see paragraph 4.2 below) is liable to
pay income tax on the following capital gains:
(a)gains or profits arising from any transfer of the ownership or usufruct of any immovable property or the
assignment or cession of any rights over such property – this applies in very limited circumstances as
described in paragraph 3.5 above;
(b)gains or profits arising from the transfer of the ownership or usufruct of or from the assignment or cession
of any rights over any securities, interest in a partnership, business, goodwill, business permits, copyright,
patents, trademarks and trade-names and any other intellectual property;
(c) gains or profits arising from a transfer of the (full or partial) beneficial interest in a trust;
(d)gains arising on certain transfers of value in a company resulting from certain changes in the issued share
capital – subject to certain conditions.
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4.2
The jurisdictional rules of the ITA are applicable for any type of income, including capital gains. In terms of
such rules, generally persons who are both ordinarily resident and domiciled in Malta are taxable on their
worldwide chargeable income and capital gains, whereas persons who are domiciled but not ordinarily
resident in Malta and persons who are not domiciled but ordinarily resident in Malta are taxable on their
income arising in Malta and on their foreign source income which is remitted to Malta. However, such
persons are not taxable on any capital gains arising outside Malta notwithstanding that such gains may have
been remitted to Malta.
The charging provision under Maltese tax law is the term “ordinarily resident” and hence a distinction must
be drawn between the terms “resident” and “ordinarily resident”. With regards to individuals, the term
“resident” generally refers to a person who is physically present in Malta for at least 6 months in the relevant
calendar year. The term “ordinary residence” also implies that a physical presence of at least six months in
Malta would constitute a determining factor, an objective criteria and would also serve as an indicator of
ordinary residence in Malta. However, a person may be considered “ordinarily resident” in Malta even though
such person may have been physically present in Malta for less than six months (subject to satisfying other
criteria). This is due to the fact that generally a number of factors are considered when establishing whether
an individual is deemed to be ordinarily resident in Malta for tax purposes. However, typically a person is
described as being “ordinarily resident” in the place where he returns to most often, the place where one is
resident in the ordinary or regular course of one’s life. Accordingly, one must not apply arbitrary criteria when
attempting to establish an individual’s place of ordinary residence and each case must be examined on its
own merits.
Unlike residence and ordinary residence, domicile is more of a permanent nature and is generally considered
to be the place where one intends to reside permanently. Indeed it is widely accepted that an individual’s
domicile is the domicile of origin – that is the domicile acquired at birth by virtue of the domicile of the father,
or of the mother in the case of children born out of wedlock. In the event that the parents are unknown, the
domicile is considered to be the place where the child is first found. A person may only have one place of
domicile at any given time.
4.3
Tax rates
Subject to certain exceptions the corporate income tax rate is 35% whereas individuals are taxed at
progressive income tax rates according to different tax bands – with the maximum tax rate being 35%
(charged on any income exceeding EUR 60,000).
4.4
Exemptions from income tax on capital gains
The exemptions from RETT (listed in paragraph 3.4 above) apply in the same manner with respect to capital
gains that may apply for the transfers of any asset (except where such exemption is clearly applicable for
transfers of property), including any capital gains on transfers of immovable property or any right thereon that
may apply in the very limited circumstances described in paragraph 3.5 above. Furthermore, the following
capital gains are also exempt from income tax:
a)transfers of securities (including securities in certain collective investment schemes) listed on a stock
exchange recognised in terms of Maltese law;
b) transfers of assets in the circumstances described in paragraphs 3.4 (c), 3.4 (d) and 3.4 (e) above;
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c)Proportionate share capital reductions/increases are exempt from any capital gains on any transfer of
value between shareholders. Transfers of value are also exempt if the value is being transferred between
certain close family members and relatives in terms of the ITA;
d)certain transfers involving the exchange of shares on restructuring of holding upon mergers, demergers,
divisions, amalgations and reorganisations – subject to the satisfaction of certain conditions.
5.
Duty on documents and transfers
5.1
Taxable event
In terms of the Duty on Documents and Transfers Act (Cap. 364 of the Laws of Malta) (“DDTA”) any transfer
(including a donation and a transmission mortis causa) of immovable property (or a real right over such
immovable property) and shares (marketable securities) in a company is charged to duty on documents.
Furthermore, any change in the issued share capital or a change in voting rights attached to shares in a
company that results in a change in the market value of shares held by a person in such company shall
be also charged to duty. Such a change is considered to consist of a shift in value between shareholders
and the person transferring such value (“the transferor”) shall be deemed to have made a transfer which is
charged to duty in terms of the DDTA.
Duty is charged in the following events:
• on the execution of certain documents (giving rise to any of the transactions described above) in Malta;
• on the use of foreign documents in Malta, if such document would have been so chargeable according to
the provisions of the DDTA, had it been executed in Malta.
5.2
In practice any duty to be paid in terms of the provisions of the DDTA is generally paid by the transferee or
the person acquiring the asset subject to duty. Contrary to income tax on capital gains, duty is chargeable
irrespective of the status of the transferee or transferor and the liability to pay duty arises upon any of events
described in paragraph 5.1.
5.3
Rates of Duty
A transfer of immovable property is charged to duty at the rate of EUR 5 for every EUR 100 (or part thereof)
of the higher of:
• the consideration paid for the transfer; or
• the market value of the transfer.
In any transfer of marketable securities the rate of duty is that of EUR 2 for every EUR 100 or part thereof of
the amount or value of the:
• consideration; or
• the real value (whichever is the higher) of the marketable security.
However such rate is increased to EUR 5 for every EUR 100 or part thereof if the marketable securities being
transferred are held in a company where 75% or more of its assets, excluding all current assets other than
immovable property, consist of immovable property or rights over immovable property.
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5.4
Exemptions from duty
Subject to the satisfaction to certain conditions the following shall be exempt from duty: in terms of the DDTA:
• the assignment of immovable property and the transfer of marketable securities between persons
who are married or who were formerly married to each other, consequent to a consensual or judicial
separation or to a divorce between such persons, or on the dissolution of the community of acquests
existing between them or on any partition of any property held in common between spouses, being
community property or otherwise on the death of one spouse between the surviving spouse and the heirs
of the deceased spouse;
• In the event that the transferee is acquiring an immovable property in Malta to be used as his/her sole
ordinary residence, the amount equivalent to EUR 150,000 of the transfer value will be charged at the
rate of EUR 3.5 for every EUR 100 or part thereof. Any amount of the transfer value that exceeds EUR
150,000 will be subject to the normal rate of EUR 5 for every EUR 100 or part thereof. Certain temporary
regulations allow such amount to be outright exempt (rather than charged at EUR 3.5 for every EUR 100
or part thereof) if the person acquiring such property is a first-time buyer and such property is the first
immovable property he/she is acquiring (other than by way of any donation mortis causa) – subject to the
satisfaction of certain conditions, including the principal condition – that such acquisition is made by not
later than December 31, 2016;
• Subject to certain conditions, in transfers by a gratuitous title by a person to his descendants in the direct
line who acquire immovable property for the purpose of establishing therein or constructing thereon their
sole, ordinary residence, the first EUR 200,000 of the value of the property transferred as aforesaid shall
be exempt and duty shall be charged on the remaining value thereof at the rate of EUR 3.5 for every EUR
100 or part thereof, provided that this is the first transfer by such a person to such a descendant for this
purpose and in this manner;
• In transfers mortis causa of a dwelling house being the ordinary residence of the person from whom such
transfer originates, the first EUR 35,000 is generally exempt whilst if such property was also occupied
by the transferee as his ordinary residence at the time of such transfer, the portion equivalent to the next
EUR 35,000 (up to EUR 70,000) of the value of such immovable property shall be charged to duty at
the rate of EUR 3.5 for every EUR 100 or part thereof. Certain conditions may apply for such reduction
and if such property was only occupied as the ordinary residence by the transferee, the first EUR 70,000
shall be charged at the rate of EUR 3.5 for every EUR 100 or part thereof in lieu of the aforementioned
reductions;
• transfers mortis causa of a dwelling house (being the sole ordinary residence of the person from whom
such transfer originates) to the surviving spouse;
• transfers mortis causa of a dwelling house to descendants in the direct line provided that such dwelling
house was occupied by the transferor as the sole ordinary residence at the time of such transfer and for
the whole period of the three years preceding such transfer;
• transfers mortis causa of immovable property to disabled persons by the parent or legal guardian of such
persons – subject to certain conditions;
• a transfer of immovable property from one company to another which would qualify for the intra-group
exemption in terms of the specific provisions (largely similar and in line with the provisions under the DDTA;
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• a transfer of immovable property by a company to its shareholder in the course of winding up where the
said shareholder is an individual or his/her spouse, who owns or own, directly or indirectly, not less than
95% of the share capital and voting rights in the said company transferring the property as aforesaid;
• a transfer of an undivided share of a dwelling house, where the dwelling house was, immediately before
the transfer, co-owned by two individuals and the transfer is made by one of the co-owners to the other;
• a deed of partition of immovable property held in common where the real value of the share of the
property assigned under the said deed to each co-owner is equal to the real value of the undivided share
held by each co-owner before the partition;
• certain transfers of immovable property made by a settlor to the trustees of a trust;
• transfers of immovable property made to a disability trust or a disability foundation where the main
beneficiary shall be a disabled person and subject to certain conditions being satisfied;
• certain transfers inter vivos of marketable securities in a foreign owned company where more than 50%
of such company’s business interests are (directly or indirectly) outside of Malta and such transfer is made
by or to a person who is not ordinarily resident and domiciled in Malta;
• certain transfers or exchanges of shares upon restructuring of holdings through mergers, demergers,
amalgamations and re-organisations with a group of companies that satisfy certain conditions;
• Proportionate share capital reductions/increases are exempt from any capital gains on any transfer of
value between shareholders. Transfers of value are also exempt if the value is being transferred between
certain close family members and relatives in terms of the DDTA, or if the shares being transferred are
shares in a company which is listed on a stock exchange recognised in terms of Maltese law. If such
change in the share capital is a result of a reorganisation exempt under the DDTA any transfers of value
may also be exempt if certain conditions are satisfied.
6.
Maltese law does not impose any inheritance tax, gift tax or wealth tax. Accordingly Malta did not enter into
any DTAs that provide specifically for the avoidance of double taxation arising on any inheritance or any gift
tax and wealth tax. However, Malta has concluded around 70 DTAs for the avoidance of double taxation on
income and capital gains – with such treaties being largely based on the OECD Model. To the extent that any
income tax on capital gains may apply to a donation or transfer of certain assets (as discussed in Section 4.1
above) any benefits under such DTA may be claimed.
However, generally treaties are not applicable for any RETT or any duty on documents that may be due on
any transmission mortis causa, donation or transfer as described in section 3 and section 5 (respectively)
above. In this respect Maltese law provides that subject to the satisfaction of certain conditions a nonresident person may opt out of RETT for a transfer of immovable property in Malta and in such a case the
capital gains derived on such transfer would be subject to income tax in lieu of RETT, subject to a nonrefundable provisional tax payment equivalent to 7% of the transfer value.
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B.
Civil law
Prepared by David Farrugia (Advocate admitted to Maltese Bar) ([email protected]).
1.
In terms of the Maltese Civil Code, a donation inter vivos is a contract whereby the donor irrevocably and
gratuitously transfers a thing to the donee who accepts it. A donation in which the donor reserves to himself
the power to revoke or alter the donation itself is void except in certain limited circumstances. A donation
shall only be valid in terms of Maltese law to the extent that it includes the present property of the donor. In
general any donation is only valid in terms of Maltese law if it is made by virtue of a public deed. However,
such restriction does not apply to:
• manual gifts of money or of other movable corporeal things, or of documents to bearer, when the sum or
value thereof is moderate, regard being had to the condition of the persons and to other circumstances;
and
• any gratuitous renunciation of rights or assignment of debts or negotiable securities, or to any remission
of debts or any stipulation made in favour of third parties in certain limited circumstances provided under
the Maltese Civil Code.
2.
In terms of the provisions of the Maltese Civil Code, a transfer mortis causa (i.e. by way of inheritance) can
take place either by operation of the law (“intestate succession”) or by disposition of man (i.e. by virtue of
a public will or secret will) (“testate succession”). Succession takes place only if an estate or a particular
property exists. This constitutes the subject matter of succession.
2.1
Legal order of succession (intestate succession)
Generally intestate succession takes place, in whole or in part, by operation of the law where:
• there is no valid will;
• the testator has not disposed of the whole of his estate;
• the heirs-institute are unwilling or unable to accept the inheritance; or
• the right of accretion among the co-heirs does not arise.
In terms of the Maltese Civil Code, intestate succession is granted in favour of the descendants, ascendants,
collateral relatives, spouse of deceased, and the Government of Malta, in the order and according to
the rules provided therein. In regulating succession among relations, the law takes into consideration the
proximity of relationship and does not consider either prerogative of line or origin of property unless stated by
the law. The proximity of relationship is determined by the number of generations – each generation forms a
degree whereas the series of degrees form a line. In general any person is capable of receiving by virtue of
an intestate succession provided however that a person who is incapable or unworthy of receiving by will is
also incapable or unworthy of receiving by intestate succession. Similarly, persons who, by violence or fraud,
prevented the deceased from making a will are also incapable of receiving by intestate succession.
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Any children or descendants of a person who is excluded as unworthy shall not be excluded by reason of
the unworthiness of their parent or ascendant, irrespectively as to whether they succeed in their own right or
whether, in order to succeed, they have to stand, under the rule of representation, in the place of the parent
or ascendant so excluded.
Where the deceased is survived by children or descendants and a spouse, the succession devolves as
to one half upon the children and other descendants and as to the other half upon the spouse. However,
such succession shall not prejudice the right of habitation in the matrimonial home and the use of contents
thereof to be enjoyed by the surviving spouse. Where the deceased has left children or other descendants
but no spouse, the succession devolves upon the children and other descendants. Where the deceased has
left no children or other descendants but is survived by a spouse the succession devolves on the spouse.
Where the deceased has left no children or other descendants, nor a spouse, the succession shall devolve
as to one half of the estate to the ascendants and the other half to the direct relatives in terms of specific
rules used to determine the proximity of relations. In the absence of any ascendants the whole estate shall
devolve on the direct relatives and in the absence of any direct relatives the whole estate shall devolve on the
ascendants. In the absence of any ascendants or any direct relatives the estate shall devolve on the closest
relative.
2.2
Testamentary succession (testate succession)
Testate succession allows for two main types of succession: bequests by universal title, whereby the testator
bequeaths to one or more persons (the heir/s) the whole of his property or a portion thereof, and bequests
by singular title (the person/s in whose favour such disposition is made being referred to as the legatee/s).
In universal succession, the whole estate (or part of the estate) of the deceased devolves on the heir, and
it therefore includes all the rights and obligations of the deceased relating to such estate or part thereof.
Accordingly the heir would be subject to all the rights and obligations of the deceased. On the other hand a
legacy is granted on particular property (and not on the estate) of the deceased. Therefore the legatee will
not be obliged to satisfy the debts of the deceased – with the exception of any debts that are specifically
burdening the particular property on which he was granted the legacy, or any other specific debt that was
expressly imposed on him.
The testator is restricted as to the minimum portion that he is obliged to bequeath to the descendants
and the surviving spouse, referred to as the “reserved portion”. The reserved portion due to all children is
equivalent to one third of the value of the estate if there are not more than four children or one half of such
value if there are five or more. Where a deceased spouse is survived by children or other descendants, the
surviving spouse shall be entitled to one fourth of the value of the estate in full ownership whereas if there are
no children or descendants the reserved portion due to the surviving spouse is equivalent to one-third of the
value of the estate in full ownership.
2.3
Testamentary formalities and types of wills
2.3.1 General testamentary formalities
Generally the testamentary formalities to be followed depend on the type of will to be adopted. The type
of will to be used is in turn dependant on various factors. Whereas the testator is generally free to choose
between any form of ordinary will or a Unica Charta will (see paragraph 2.3.2 below), a privileged will may be
the only choice available in certain circumstances (see paragraph 2.3.2(c) below).
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2.3.2 Types of wills
a) Ordinary wills – ordinary wills are typically divided into public wills and secret wills:
Public wills
A public will is received and published by a notary in the presence of two witnesses and must be signed by
the notary, the testator and the two witnesses. The signature of the witnesses can in no case be dispensed
with whatever may be the value of the asset disposed of by the will.
Secret wills
A secret will may be printed, type written or written in ink either by the testator or a third party. If the testator
can write and is in a position to do so the will must be signed by the testator. Should the testator be unable
to write or not in a position to sign at the moment the will is being drawn up then the secret will is to be
considered as valid only if certain formalities are adhered to, including the obligation to follow the instructions
and assistance of a judge magistrate. The paper on which the secret will is written or the paper used for the
secret will shall in all cases be sealed and closed and delivered to a notary or to the registrar of the court in
the presence of a judge or magistrate.
b) Unica Charta wills
A Unica Charta will, by way of an exception, allows more than one person to make their will in one and the
same instrument. This is the only type of will that allows this. However one of the central elements of such
will is that in any case where, by a will Unica Charta, the testators shall have bequeathed to each other the
ownership of all their property or the greater part thereof with the express and specific condition that if one of
the testators revokes such bequest he shall forfeit any right in his favour from such joint will, the survivor, who
shall revoke the will with regard to such bequest, shall forfeit all rights which he or she may have had in virtue
of such will on the estate of the predeceased spouse.The forfeiture mentioned above can also be ordained in
the case where, by his or her act, the said bequest cannot be effectual with regard to his or her estate.
c) Privileged wills
In Malta we have two forms of privileged wills. In principle such wills are only to be used in specific, peculiar
circumstances due to the less rigid formalities that apply in such cases, with separate and additional
formalities prescribed in the Civil Code for wills drawn up in such circumstances. The two types of privileged
wills are the following:
• wills in places where communications are interrupted;
• wills made at sea.
111
3.
Other instruments used for succession planning – trusts and foundations
Malta is a civil law jurisdiction however it has successfully embraced and implemented the legal framework
for trusts, which is traditionally a common law concept. The civil law basis of the Maltese legislative
framework also means that Malta offers the possibility of foundations in addition to trusts.
The principal legislative framework for trusts in Malta is the Trusts and Trustees Act which was enacted
in 2004. It is largely based on the Jersey Trust Law and allows Maltese and foreign residents to establish
trusts governed either by Maltese law or by a foreign law. This flexibility together with the tried and tested
legal basis of Malta’s trusts law provides an attractive proposition for succession planning and wealth
management. Trusts can be created inter vivos or mortis causa.
The legal provisions governing foundations were enhanced by Act XIII of 2007 which clarified the legal
structure of foundations, even though foundations had already been adopted as a civil law concept under
the Maltese legal system. Foundations can only be created by virtue of a public deed inter vivos or a will and
can be either purpose foundations or private foundations. Purpose foundations are established exclusively
for a charitable, philanthropic or other social purpose or as a non-profit organisation or for any other lawful
purpose. On the other hand, private foundations are set up for the benefit of predefined beneficiaries.
4.
Maltese law generally exercises its jurisdiction in succession matters on the basis of the place where the
immovable property is situated (“lex situs”) and the place of domicile of the deceased at the time of his/her
death (“lex domicilii”) (with respect to movables).
Being an EU member state, Malta has fully adopted the new EU regulation on succession and in this
respect any conflict between any member states as to the applicable law and jurisdiction can benefit from a
consistent set of rules that are included therein.
With regard to the new EU regulation on succession, see general description as outlined on page 4 which
also applies to Malta.
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Mexico
A.
Tax law
1.
1.1
Taxable event
The fundamental regulations concerning inheritance and gift tax are provided in the Income Tax Law (“ITA”, “Ley
del Impuesto Sobre la Renta”). According to this law, Mexican resident individuals who obtain inheritance or
legacy income may consider such benefit as exempt for tax purposes, disregarding the amount or type of asset
that is being transferred. In addition, gifts and donations may be not taxable, as follows:
• between spouses or those obtained by descendants of direct ascendants thereof, regardless of amount;
• those obtained by ascendants from their direct descendants, if the assets so received are not alienated or
donated by the ascendant to another direct descendant, without limitation as to degree;
• other donations, provided, that the total value thereof received in a calendar year does not exceed three
times the yearly general minimum wage (MXN 76,759.50). Tax shall be paid on any excess.
Therefore, the only taxable event occurs when the sum of donations received in a calendar year exceeding
the amount of MXN 76,759.50 are obtained by individuals other than those listed above.
The basis of assets acquired due to inheritance, legacy or donation shall be deemed to be that paid by
the initiator of the estate or the donor, and the date on which they were acquired by said persons shall be
the date of acquisition thereof. The acquisition cost on taxable donations shall be the appraisal value for
computation thereof, and the date of such payment shall be the acquisition date.
1.2
Tax liability is linked to the acquirer of the gift and the asset that is being acquired.
Unlimited tax liability applies if the acquirer of the gift is a Mexican resident when the gift occurs. Individuals
are considered Mexican residents if they have a permanent home in Mexico. In the case that they also have a
home in another country, they will be considered Mexican residents if their center of vital interests is located
in Mexico. For these purposes, it shall be deemed that the center of vital interests is located in Mexico when
they fall within any of the following assumptions:
• When the source of wealth of more than 50% of the total revenue obtained by the individual in a given
calendar year is located in Mexico.
• When the main center of his/her professional activity is located in the country.
Except if proven otherwise, individuals who are Mexican nationals are presumed to be Mexican residents.
In contrast to many other fields of law, tax liability is not linked to nationality, but depends on where the
individual has his/her permanent home. The unlimited tax liability extends to the assets worldwide, i.e. to all
assets, regardless of where they are located.
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1.2.2 Limited tax liability in the case of non-Mexican residents
If neither the heir nor the donee are Mexican residents, the inheritance or gift may be subject to taxation in
Mexico if the asset or assets in question are located in Mexico.
Tax will be equivalent to 25% on the total value of the gift or donation. In case the donee or heir is a spouse
or a descendant of the testator/donor, the transfer will not be taxable.
1.3
Maturity of taxes
In the case of donations described in the last paragraph of section 1.1, the taxable event occurs at the time
the donee receives the gift and he/she is enriched.
If the acquirer is a Mexican resident, tax shall be due in the annual tax return (April 30 of the next calendar
year in which the acquisition was made). If the acquirer is a non-Mexican resident, tax shall be due after the
expiry of fifteen days after the acquisition.
1.4
The base for the calculation of the tax is the value of the taxable acquisition. The increase in wealth of the
acquirer must be determined by an appraisal.
An advance payment should be made on the annual tax, equal to 20% of the value expressed on the
appraisal.
1.5
Rules of valuation
A person authorised by the tax authorities shall make the valuation of the transferred assets. The appraisals
made shall be valid for one year, counted as of the date they take place.
1.6
Tax exemptions
As described in paragraph 1.1, in any case, the acquisitions derived from inheritance or legacy are tax free.
Also, the acquisitions derived from donations are tax free, if they are made between spouses, descendants
of direct ascendants and ascendants of their direct descendants. For the rest of the donations there is an
exemption equivalent to three times the general minimum wage in the geographical area of the taxpayer, for
one year (MXN 76,759.5). This exemption applies for any kind of assets.
In Mexico, there is no preferential treatment for real estate or business assets.
1.7
Personal allowances
The following deductions can be applied to decrease the value of the taxable acquisition:
• state taxes;
• legal and notary fees;
• the cost of the appraisal;
• commissions and mediations paid by the acquirer.
In addition, acquirers are entitled to deduct personal allowances, such as:
• payments of medical and dental fees;
• funeral expenses;
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• donations realised to entities allowed by Mexican tax authorities;
• premiums for medical insurance;
• real interest actually paid in the fiscal year on home dwelling mortgage loans;
• complementary contributions to retirement savings.
In the fiscal year, the personal allowances can not exceed the lesser of:
• four times the general minimum wage in the geographical area of the taxpayer, for one year (MXN
102,346);
• 10% of the taxable income of the taxpayer.
1.8
Tax rates
The tax rate is progressive, i.e. the tax burden increases with the increasing value of the acquisition. The
following tax rates apply depending on the amount obtained by subtracting the personal allowances from the
value shown by the appraisal:
Lower limit
Higher limit
Fixed fee
Percentage to be applied
on excess over lower limit
MXN ($)
MXN ($)
MXN ($)
%
0.01
5,952.84
0
1.92
5,952.85
50,524.92
114.29
6.4
50,524.93
88,793.04
2,966.91
10.88
88,793.05
103,218.00
7,130.48
16
103,218.01
123,580.20
9,438.47
17.92
123,580.21
249,243.48
13,087.37
21.36
249,243.49
392,841.96
39,929.05
23.52
392,841.97
750,000.00
73,703.41
30
750,000.01
1,000,000.00
180,850.82
32
1,000,000.01
3,000,000.00
260,850.81
34
3,000,000.01
Onwards
940,850.81
35
The provisional payments realised throughout the year may be credited in the annual return.
Double taxation can occur if the transfer of assets is subject to taxation in the country of residence of the
acquirer (“unlimited tax liability”) and simultaneously certain assets constitute domestic assets in the other
country and are subject to taxation there (“limited tax liability”). Because inheritance is not taxable for Mexican
residents, inheritance tax paid abroad may not be creditable against any tax liability in Mexico.
2.
Wealth tax
There is no wealth tax in Mexico.
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3. Double taxation agreements (“DTAs”)
In the DTAs entered into by Mexico with other countries, there are no regulations concerning inheritance or
gift tax. Therefore, in case a non-resident inherits an asset that is located in Mexico or receives such asset as
a gift, the tax derived from such operation must be calculated and paid according to Mexican ITA.
4.
4.1Expatriate
In general terms, individuals who are Mexican residents for tax purposes may lose such status when they move
their permanent home or place of abode to another country, without any further consequences. In that case,
any advances on their annual tax liability that could have been made shall be considered final and definitive.
Nevertheless, should the individual move his residence to a low tax jurisdiction, he shall keep his Mexican
residence for the year in which such change occurs and the three following ones.
4.2
Pensions for Mexican residents are exempt up to the daily amount of fifteen times the minimum wage of the
taxpayer (MXN 1,066.50 per day); tax shall be paid on the excess of such amount.
In the case of foreign residents, limited tax liability is triggered in Mexico for pensions and retirement benefits when
the payments are made by Mexican residents or permanent establishments in the country or the contributions
derive from subordinated personal services rendered in national territory. The tax rate is progressive:
• There is an exemption equal to the amount of MXN 125,900 obtained during a calendar year.
• A rate of 15% shall be applied to revenues that exceed that amount and amount up to MXN 1,000,000.
• The rate of 30% shall be applied to revenues exceeding MXN 1,000,000.
Most Mexican DTAs (following art. 18 of the model treaty of the OECD) assign the taxing right for pensions
institution, most DTAs then shift the taxing right to the source country where the institution is seated.
4.3Consequences of income tax, especially in the case of a controlling interest
in a corporation
Capital gains are taxed as follows:
• 10% for Mexican and foreign residents with regard to the profit derived from the disposition of shares
issued by Mexican corporations made through a concessioned Mexican stock market, shares issued
by foreign corporations but quoted in such markets, or shares issued by Mexican corporations or
instruments exclusively representing such shares, provided that alienation of such shares or instruments
takes place in stock markets located in acknowledged markets of countries with which Mexico has
a DTA in effect.
• For Mexican residents, all other capital gains must be included to any other income earned in the fiscal
year, by applying the tax rate mentioned in paragraph 1.10.
• For foreign residents all other capital gains will be taxed with a rate of 25% on the total amount of the
transaction. If the foreign residents have a legal representative in Mexico, they may elect to apply a 35%
rate to the capital gain.
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Beyond that, tax upon the transfer of ownership of the shares may also result from numerous other
circumstances, e.g. if the shares are transferred to a non-resident taxpayer by gift or by acquisition mortis
causa, except in the case that the acquirer is a spouse or a descendant of the testator/donor.
B.
Civil law
1.
The donation is the contract in which a person (“donor”) makes a free transfer of their assets to another
person (“donee”). The donations cannot include future assets.
For donations to be valid, it is crucial that both parties (donor and donee) are alive and agree that the
respective asset is free of burdens or liens. In addition, donations must be notarised. Donations are null if
they comprise all the assets owned by the donor. He/she must keep the necessary amount of assets to
survive depending on his/her circumstances. The assets he/she might give in donation can be subject to
certain conditions imposed by him/her.
2.
Basics of transfer mortis causa/inheritance
“Transfer mortis causa” means the transfer of ownership upon death. In Mexico, the transfer mortis causa is
best known as inheritance, which is regulated by the Mexican Civil Law.
Unlike donations, inheritance is the succession of all assets, rights and burdens that are not extinguished
upon death, of the decedent (“decedent’s estate”). Obviously, the main difference between donations and
inheritance is that, for the latter, the owner of the concerned assets and rights must die. Mexican Civil Law
regulates two types of inheritance. The legal succession and the testamentary succession (“will”) which will
be described afterwards.
3.
Types of inheritance
3.1
Legal succession
Legal succession happens when an individual dies without a will or testament. This results in the allocation of
heirs by law, considering the degree of kinship between the decedent and its relatives.
Legal succession involves several setbacks or obstacles to the family of the decedent. A judge’s intervention
is required, in order to value all of the decedent’s assets, rights and burdens that are not extinguished by the
death of the decedent. After that, all the net assets and rights must be divided equally among the designated
heirs by law.
3.2
A testamentary succession takes place when the inheritance is defined by the will of the decedent.
A testator may control his succession by writing a will. Any person having unrestricted legal capabilities may
make a will. The testator must make the will in a form defined in the Mexican Civil Code to be effective.
In a testamentary succession, one of the most important issues is the designation of heirs or legatees. This is
so important because they will be the beneficiaries of the assets and rights of the decedent.
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4. Legal order of succession
As mentioned above, in Mexico the regulation of the different ways and methods in which inheritance can
be performed is governed in the Mexican Civil Code. Such civil rules provide the specific ways in which the
transfer of ownership should be based upon, depending on the two types of inheritance (legal succession
or testamentary succession) previously mentioned. For both types of inheritance, heirs are the universal
successors of the decedent.
For the legal succession, only consanguineous relatives and spouses or registered life partners are
considered heirs. Consanguineous relatives are understood as persons that descend from the same
progenitor (adopted people are considered consanguineous relatives as well).
The first-degree relatives exclude the more remote relatives. This means that spouse, children, grandchildren,
great-grandchildren and parents of the testator have preference in terms of inheritance. In absence of them,
transversal relatives go next. Transversal heirs are siblings, cousins, uncles or aunts, nephews etc. of the
testator.
In testamentary successions, the testator may designate any person as heir or legatee. Bequests may only
take place in the testamentary successions (will), not in the legal successions.
5.
Testamentary will
The testamentary will is a legal act in which the testator makes a contractual disposition mortis causa on
behalf of a third party. Testamentary contracts deeds must always be notarised. This contractual disposition
is characterised by its binding effect.
6.Bequest
As mentioned above, bequests may only take place in a testamentary succession. A bequest is an
assignment of a specific asset contained in a will, with which the testator assigns a legatee in order to give
him a private individual asset which has no more burdens than those expressly imposed by the testator. In
Mexico, legatees are considered as heirs only if they comprise all the testator rights.
7.Conditions
In Mexico, testators are free to establish applicable conditions to their property. Those conditions must be
executed by the beneficiaries (heirs or legatees). In this sense, if the beneficiaries fail to meet the conditions
imposed by their testator, they may not forfeit their benefits, as long as they prove the impossibility of the
accomplishment of those conditions.
8.
Grant of benefits (usufruct)
The usufruct is understood to mean the right to exploit and/or benefit from a certain asset. In donations, in
order to protect oneself or the spouse, the donor may keep the usufruct on certain assets to himself or other
persons. The beneficiary of the usufruct has the full right to the profits, use and benefits of the asset.
The grant of benefits stipulated in wills or testaments consists in the designation of a person by the decedent
to operate a specific asset. Also, the decedent may designate another person to be the legal owner of the
concerned specific asset.
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9.
Testamentary dispositions are subject to certain form requirements. The most common form of wills or
testaments are deeds which are executed before a notary public. In Mexico, the types of wills or testaments
conceivable are open public, close public, simplified public, holographic, private, military, maritime, and
foreign wills or testaments.
10. Right to a statutory share
Statutory shares are not regulated by Mexican laws.
11. Family foundation/trusts
Family foundations are not regulated by Mexican laws.
The treatment of Mexican trusts differs from those established under Anglo-Saxon law. Mexican trusts are
transparent mechanisms created with the purpose of vesting in a trustee’s responsibility and holding the
title of certain property or assets for the benefit of third parties. In any case, the trustee does not have the
right to the full title of property but is only entitled to execute such title of property according to the settlor’s
instructions. The tax effects of the benefits generated by the trust are imputed to their settlors and/or
beneficiaries. There are no special tax benefits for using this transparent figure, beyond the safeguarding of
the assets.
There are special trusts for inheritance, which provide greater security to the settlor’s assets.
12. Execution of the will
The decedent may designate an executor of his/her will.
13. Transnational aspects
Law on succession
In Mexico, successions on behalf of foreign heirs or legatees are allowed only if they comply with the
requirements provided by the Mexican law. The Mexican Civil Code prohibits Mexican testators to include
foreign beneficiaries who are residents in countries with no international reciprocity in this matter with Mexico
in their will.
Foreign successions with Mexican heirs or legatees will take effect only if they were made strictly under the
laws that rule in that particular country. The Mexican Civil Code establishes that Mexican consuls or viceconsuls have the power to validate the requirement mentioned above; this legal system validates consul’s or
vice-consul’s determinations as if they were notaries.
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Netherlands
A.
Tax law
1.
1.1
Taxable event
The rules pertaining to the gift tax and inheritance tax are laid down in the Netherlands Inheritance Tax Act
1956 (“ITA”). The gift tax applies to whatever one has acquired as a gift from someone who has been residing
in the Netherlands upon granting this gift. The inheritance tax applies to whatever one has acquired by virtue
of the inheritance law from someone who has been residing in the Netherlands upon his death.
The term “gift” is interpreted pursuant to the Netherlands Civil Code, distinguishing donations from gifts:
• A gift is any act out of generosity by which the person performing the act enriches the other at the
expense of his/her own funds.
• A donation is a specific form of a gift. It is an agreement for free under which one party, the giver, enriches
the other party, the recipient, at the expense of his/her own funds.
For gifts as well as donations, the impoverishment of the donor and the enrichment of the recipient is
required. Both parties must have had the intention to benefit and disadvantage one another.
The term “gift” comes with a broad interpretation, and includes situations which are not a donation according
to their form, however, in tangible terms they do involve benefits. An example of this is selling your own home
to your children at a very low price.
In principle, donations have no set form; hence they do not require a notarial deed. One exception is the
donation that will only become effective upon the donor’s death. In addition, the donation of e.g. immovable
property and shares does require a notarial deed, owing to its general transfer requirements.
For the inheritance tax, the term “by virtue of the inheritance tax” should be interpreted in a broad sense.
First of all, it dovetails with the inheritance tax as laid down in the Netherlands Civil Code, and therefore it
includes the share in the inheritance, a specific legacy and a statutory share. In addition, the inheritance tax –
in order to avoid misuse – comes with a number of additions to the inheritance concept: fictitious acquisition
according to the law of inheritance. For instance, this involves:
• Excessive interest on debts according to the law of inheritance is regarded as acquisition according to the
law of inheritance in case interest is claimed upon death.
• Converting property into usufruct when alive will lead to fictitious acquisition upon the beneficiary’s death.
• A donation within 180 days prior to the legator’s death will lead to fictitious acquisition.
1.2
The gift and inheritance tax is due provided a gift is obtained from a person who was residing in the
Netherlands upon granting the gift or upon his/her death. Where a person is residing needs to be determined
using all relevant circumstances including the socio-economic centre of a person’s life, the existence of a
home, the place of residence of the family members, involvement in associational life, etc.
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A person who is not residing in the Netherlands according to the basic rule might still be regarded as a
resident according to the ITA, for the law provides three fictions that lead to Dutch citizenship:
• A Dutch person who emigrated to the Netherlands less than 10 years ago is considered to be a resident
of the Netherlands.
• A Dutch person who is employed by the Dutch authorities and who is stationed abroad is considered to
be a resident of the Netherlands.
• All who have lived in the Netherlands and who have made a donation within one year after departure from
the Netherlands are considered to be residents of the Netherlands.
1.3
Maturity of taxes
Acquisition by means of a donation takes place once the donation has been concluded. An exception
applies to donations under suspensive conditions, in which case the donation is deemed to have been
concluded once the condition has been met, in which case the date of the gift agreement is irrelevant.
Acquisition by means of the inheritance law takes place upon the transferor’s death. The time of death is
significant for determining the extent of the inheritance (and of it the amount of the tax due).
1.4
Tax is levied according to the value of the acquisition, less any exemption.
1.5
Rules of valuation
The basic rule is that the gift acquired needs to be carried at the market value upon acquisition. It is the
price that would have been spent upon offering the property for sale in the manner most appropriate for the
property subsequent to the best preparations for the time of sale by the best offering candidate.
The following valuation rules apply to e.g.:
• immovable property;
• business assets;
• regular payments;
• usufruct and bare ownership.
1.6
Tax exemptions
The ITA provides allowances for a variety of acquisitions. The main regulations are mentioned below.
1.6.1 Tax exemptions/preferential treatment of business assets
In principle, acquiring business assets is fully taxed in terms of the gift and inheritance tax. To ensure that
this taxation cannot jeopardise the continued existence of the company, upon continuation of the acquired
company by the recipient or beneficiary a partial exception for the business assets will be applicable.
The essence of the ruling consists of the following exemptions:
• 100% of the company’s value up to EUR 1 million;
• 83% of the company’s value exceeding EUR 1 million.
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For taxes that might be due for the remaining business assets, an interest-bearing deferment of payment can
be obtained for 10 years.
The main condition for this facility is that the recipient pursues the company for at least five years.
1.6.2 Tax exemptions/socially involved entities
Exceptional rules exist for socially involved entities: the Public Benefit Organisation (in Dutch: “ANBI”) and the
Social Benefit Organisation (in Dutch: “SBBI”). Acquisitions through an ANBI or SBBI are entirely exempted
from gift and inheritance tax.
Also donations received from an ANBI are exempted from gift tax.
1.6.3 Tax exemptions/real estate
Upon acquiring real estate, the recipient must pay transfer tax. If the real estate is gifted or in case it is sold at
a very low price, then a donation or gift has taken place. In order to avoid the concurrence of the transfer tax
and gift tax, the rule is this: transfer tax concerning the amount on which gift tax is levied may be settled with
the gift tax.
1.7
Tax free amounts/personal allowances
A number of exemptions exist when gift tax and inheritance tax are involved. Exemptions are increasingly
limited in case the giver/the deceased and the recipient are less closely related.
The main gift tax exemptions are the following:
• Child receiving from its parents: EUR 5,277;
• Acquisition by someone who is unable to pay his debts: entirely exempted;
• Otherwise: EUR 2,111.
The main inheritance exemptions are the following:
• Spouses and partners EUR 633,014;
• (Grand)children EUR 20,047;
• Ill and disabled children EUR 60,138;
• Acquisition by parents of a child EUR 47,477;
• Otherwise EUR 2,111.
1.8
Tax rates
For the gift and inheritance tax, the tax rates are as follows:
Acquiring EUR
0
More than 121,296
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Up to EUR
Partners and
children (%)
Grandchildren
(%)
Other recipients
(%)
121,296
10
18
30
20
36
40
Due to the various levying criteria and their broad interpretation, international double taxation might occur. If
no treaty is applicable to the situation at hand, under specific circumstances the Netherlands will unilaterally
offer a compensation. The latter is provided in five situations:
• The deceased resided in the Netherlands;
• the deceased was deemed to be living in the Netherlands;
• in case of other concurrent taxation;
• in case of a donation under suspensive conditions;
• upon applying the special tax regime for Separate Private Funds (in Dutch known as “Afgezonderd
Particulier Vermogen or APV”).
2.
Wealth tax
Dutch wealth tax has been abolished as of 2001. Instead an income tax is charged on the taxpayer’s assets.
This investment yield tax (also known as “box 3”) assumes a fixed return on investment of 4% of the yield
base. The yield base is the difference between the assets and the liabilities. The yield base is determined on
January 1 of the calendar year. The reference date of January 1 also applies if a taxpayer does not yet owe
any inland tax on January 1 or if the inland tax obligation ends during the calendar year for reasons other
than death.
The assets in box 3 include: savings, a second house or holiday house, properties that are leased to third
parties, shares that do not fall under the substantial interest regime and capital payments paid out on life
insurance.
Liabilities in box 3 include: consumer loans and mortgage bonds taken out to finance a second house. Per
person, the first EUR 3,000 (2015) of the average debt is not deductible from the assets.
Proposed changes
On Budget Day 2015 the following changes to the investment yield tax were proposed to align the taxation
to actual yields:
The fixed return on investment will be calculated on the basis of ascending fixed percentages:
• 2.9% on assets with a total value of EUR 25,000 up to EUR 100,000;
• 4.7% on assets with a total value of EUR 100,000 to EUR 1,000,000;
• 5.5% on assets with a total value exceeding EUR 1,000,000.
Assets with a value not exceeding EUR 25,000 will be exempt from the investment yield tax.
Tax partners may allocate their joint assets to their partner. This allocation may affect the tax burden due
to this ascending fixed return on investment. Each year the percentages will be determined on the basis of
relevant market information on interest and investment results.
The proposed changes are planned to come into force as of January 2017. It is however uncertain if
parliament will agree with the changes.
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3.
The Netherlands has signed DTAs with the following countries in order to avoid double inheritance tax:
• Austria;
• Finland;
• Great Britain and Northern Ireland;
• Israel;
• Sweden;
• Switzerland;
• US.
The DTAs with Great Britain and Austria involve the gift tax as well.
4.
4.1
Income tax in the case of a relevant shareholding in a corporation
The Dutch income tax provides a special regime for those holding a so-called substantial interest in a
company with assets divided into shares or a cooperation. Those – with their partners or otherwise – who
have a direct or indirect interest of at least 5% in such a body will be taxed for both the fruit this interest
bears (e.g. dividend) and the gains from alienation obtained with it. In both cases a 25% levy will prevail.
The regime also applies to non-residents of the Netherlands in case they have a substantial interest in a body
based in the Netherlands. In the event of immigration or emigration, special rules will apply to avoid double
taxation (“step up”) and also to avoid Dutch taxation (“exit tax”).
4.2
Secluded private equity
A special regime applies when Dutch income tax, gift and inheritance tax is involved to make taxation
possible on assets that have been put into a foundation or trust outside the direct sphere of influence
(“floating assets”).
The essence of the regime is to have fiscal transparency in terms of the floating assets. For the income tax,
the assets are assigned to whoever was the settlor at the time the assets were transferred to the legal entity.
The assets are thus taxed to the contributor in the regular manner, even though the contributor does not
actually have access to these assets.
Transparency also applies to the gift and inheritance tax. Hence, bringing assets into the legal entity is not
regarded as a donation. Nevertheless, once a beneficiary obtains a specific legally enforceable right from the
legal entity, then a fictitious acquisition by virtue of the inheritance law or a fictitious donation is assumed.
This right is assumed to have been assigned by the contributor.
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B.
Civil law
1.
Transfer of assets during life
It is possible in the Netherlands to transfer assets during life to, for example, children. Legal entities can
also benefit. This can take place by means of a donation or by means of a gift. The Dutch legislature found
it necessary to make this distinction to ensure that (legal) acts that do not fulfil the formal requirements of
a donation, but do have the intent of a donation, fall under the statutory rules of a donation as much as
possible.
1.1Donation
A donation is an agreement that results in one of the parties being impoverished and the other party being
enriched. There must be a number of conditions in the event of a donation, which are:
• there must be an agreement;
• the agreement is “without financial consideration”;
• the donor must be impoverished due to the agreement while the donee is enriched; and
• it must concern a voluntary payment, or an intention of benefiting.
1.2Gift
A gift is each act which takes place with the purpose that the party executing the act enriches another at
the expense of that party’s own assets. This means that a gift is a broader concept than a donation. The
conditions referred to above that are applicable to a donation therefore do not all apply to a gift. A good
example of a gift is the sale of goods at a price that is too low. In that case a donation has not taken place,
because this agreement is not “without financial consideration”. However, as a result of this agreement the
seller has become impoverished and the purchaser has consequentially become enriched.
The result of these definitions is that a donation is also always a gift, but a gift is not always a donation.
1.3
The formal requirements
There are no formal requirements for a donation or a gift to effect these. However, it can be important in
certain situations to record the donation or the gift in a notarial deed. This is important, for example, in order
to be able to later provide incontrovertible evidence that the donation or the gift has taken place as well as
the conditions under which this has taken place.
It can also be the case that other statutory formal requirements must be fulfilled for the donation concerned.
In the event of the donation of, for example, immovable property a notarial deed of transfer is always
required.
2.
General rules of the law of inheritance
Dutch law has arranged the law of succession in such a manner that one can inherit in accordance with a
system arranged by the law (“to inherit by intestate succession”), or in accordance with a system chosen by
the testator (“to inherit pursuant to a last will and testament”). Those who can inherit are natural persons as
well as legal entities.
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2.1
Statutory law of inheritance
The statutory law of inheritance applies if the deceased has not made a last will and testament (testamentary
disposition and/or testament), or the last will and testament has not arranged the entire estate. In that case
the law arranges who will inherit and what these parties will inherit. In that case a beneficiary will always
inherit under “universal title”. This means that the beneficiary inherits (his/her share in) the goods and/or legal
relationships and also always the debts accompanying (the share).
A sequence of inheritance applies to the statutory law of inheritance. The partner (spouse or registered
partner) in this respect is in an equal position with the children. They will each inherit an equal share.
If there are predeceased children the descendants of this child will jointly inherit his or her share in the
estate ( “substitution”). As long as there is a partner and/or there are descendants these persons, or the
sole surviving person from this group, will inherit the entire estate. If there is no partner, or there are no
descendants, the parents will inherit together with the brothers and sisters. The principle applies that the
parents and brothers and sisters each inherit an equal share, but each of the parents will always inherit at
least 25%. If the parents are no longer alive the brothers and sisters will inherit everything. In the event that
the brothers and sisters inherit, the principle of substitution will apply again.
The law arranges inheritance up to the sixth degree. If nobody has survived to inherit, the estate will devolve
to the State of the Netherlands.
2.2
Last wills and testaments
It is possible to derogate (partially) from the statutory law of inheritance by means of a testament as well as
by means of a testamentary disposition. For example, a legatee can be appointed by means of a testament
or a testamentary disposition. A legatee is someone to whom the testator has granted a right of claim. That
which a legatee receives through the bequest will be under “particular title”. This means that he or she only
receives what the testator has bequeathed to him/her, without for example the debts that might be vested in
the bequest.
2.3
Types of last wills and testaments
2.3.1 Testamentary disposition
A testamentary disposition is a document entirely handwritten by the testator personally, in which the
testator grants specified goods to another. This testamentary disposition must thereupon be provided with a
signature and also in fact signed by the testator. Exclusively specified goods can be bequeathed to persons
in a testamentary disposition. The goods that can be bequeathed by means of a testamentary disposition
can be: clothes, personal clothing and jewellery, household effects and books. It is not possible to make a
testamentary disposition for other goods.
2.3.2Testament
There are three types of testaments in the Netherlands with which the statutory law of inheritance can be
derogated from and in which legatees can also be named. The types are:
• the notarial will;
• the filed will;
• the emergency will.
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The notarial will is a last will and testament drawn up by means of a deed and signed in the presence of a
civil-law notary as well as by the testator as well as the civil-law notary.
The filed last will and testament is a last will and testament that is drawn up by or on behalf of the testator
and thereupon signed by the testator. This last will and testament can be handwritten or typed. This deed is
thereupon given to a civil-law notary for safekeeping. This takes place due to the fact that the civil-law notary
draws up a notarial deed for this giving in safekeeping, which notarial deed will be signed by the testator as
well as by the civil-law notary.
Last of all there is the emergency will. This is a very special type of last will and testament, which can only
be drawn up in very exceptional circumstances, such as war, extreme disasters and suchlike. There are also
very specific requirements set out for such a last will and testament. Especially because such a last will and
testament can only be drawn up under very special circumstances it is very rare that use is made of this.
In the Netherlands one can exclusively make a last will and testament individually. It is therefore not possible
for partners to make a last will and testament jointly.
2.4
Testamentary obligation
A testator can also impose an obligation in his/her last will and testament on a beneficiary or a legatee. For
example, this obligation can mean that the value of goods that the person acquires in this manner must be
reimbursed to the estate. Other obligations are also possible, for example to do something or actually to
refrain from doing something.
2.5
Acceptance and renunciation
Each beneficiary or legatee must at some point in time accept or renounce his or her acquisition. There are
no very special rules for the renunciation of a bequest, it is sufficient if one makes one’s choice clearly and
unambiguously. There are formal rules for the acceptance or renunciation of an inheritance. One can accept
an inheritance without an inventory being made, or accept or renounce an inheritance under the benefit of
inventory. To accept an inheritance without an inventory being made means that one accepts the heirship
with all the accompanying debts. Acceptance under the benefit of inventory means that initially what the
inheritance consists of needs to be known, before one makes the final decision to accept an inheritance
without an inventory being made or to renounce the inheritance. If one renounces the inheritance one loses
all right thereto, but one also does not incur any debts from the inheritance.
The acceptance or renunciation in principle takes place by submitting a statement to the office of the clerk
of the court. One can also accept (be unaware of accepting) an inheritance without an inventory being made
because one behaves as a beneficiary. Once one has made the choice (even if it is done without being aware
of this because one is behaving as a beneficiary) one can no longer change one’s mind.
2.6
The statutory share
The children of the testator always have the right to a minimal share in the estate, this share in the estate is
called the “statutory share”. This share in the estate is half of the usual share in the estate which they have
the right to on the basis of the statutory law of inheritance. A testator can indeed disinherit a child in his/her
last will and testament, but the child concerned can subsequently always demand his/her statutory share. It
can sometimes be necessary to commence legal proceedings for this.
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A statutory share is essentially a monetary claim against the other beneficiaries. However, the testator can
also “pay” the statutory share in kind, for example by making the child concerned a beneficiary or forced
heir. The law does set out requirements for such a disposition. The share in the estate to the amount of the
statutory share must be “free and unencumbered”. For example, a child can inherit a share in the house, but
no mortgage is permitted to be vested in the house.
It also applies to the statutory share that if a child is predeceased, his or her descendants can take the place
of their predeceased (grand) parent.
The statutory share is calculated over the value of the total assets of the testator. Furthermore, specific
donations made in the past are added to this.
2.7Usufruct
The testator can also devolve a usufruct to legal entities/natural persons by means of his/her last will and
testament. A usufruct means that that the usufructuary acquires the right to all “fruits” from the goods or right
concerned. The rest of the “property”, called the “optional right to acquire bare ownership of estate property”
or “bare ownership” will then accrue to the other legal entities/natural persons. For example, if one inherits
the usufruct of a bank account, one will have the right to the interest paid by the bank, but the original assets
remain owned by the other legal entities/natural persons designated by the testator.
However, it is possible that the testator gives the usufructuary the right to “draw on” the usufruct assets.
This means that the usufructuary not only has the right to the income from the assets concerned, but also is
permitted to use the assets concerned.
2.8
Execution of the last will and testament
The testator can arrange in his/her last will and testament that one or more of the legal entities/natural
persons appointed by him/her must ensure that everything stated in the last will and testament is actually
executed. In that case this person becomes the “executor”. The executor has been given specific rights
by the law to be able to ensure that the execution can actually be achieved. It is possible to extend these
powers by also appointing the executor as the administrator with full powers of administration. The executor
and the administrator with full powers of administration do not have to be the same person.
2.9
Survivorship clause
It is also possible to acquire property as the result of death outside the law of inheritance. This will in that
case take place on the basis of a survivorship clause. Such a clause is made between two persons and
they thereby determine that if one of them dies the goods that they jointly own will automatically become the
property of the surviving person. Such a clause is not a clause according to the law of succession, but is
governed by the law of contract.
2.10 Family trust/trust
Dutch civil law does not have any specific family trust or trust. However, it is possible to achieve a
comparable system by means of a foundation, but this is usually considerably limited by tax regulations that
apply to this and that is the reason why this is not often used.
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3.
International aspects
The Netherlands is a signatory to a number of international treaties concerning international situations in the
event of inheritance. These are inter alia the Hague Form of Wills Convention 1961, the Hague Succession
Convention 1989 and the European Regulation on succession.
With regard to the new EU regulation on succession, see general description as outlined on page 4 which
also applies to the Netherlands.
In the event of international law of inheritance the Netherlands makes a distinction between inheritance itself
and the manner of administration of the estate. Separate rules of conflict of laws are applied to this.
A testator can make a choice with regard to the inheritance for the law of the country of which he/she has
the nationality at the time of the choice of law or death, or as the case may be the law of the country where
he/she has his/her habitual residence at the time of the appointment or death. If he/she does not personally
make the choice the legal system applies as this can be determined by the treaty concerned on the basis
of the objective rules. The testator cannot personally make a choice with regard to the administration of
the inheritance. This is arranged essentially by the treaty concerned. However, the beneficiaries can jointly
choose another legal system.
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Russia
A.
Tax law
1.
There are no special inheritance and gift taxes in Russia. They were abolished by the law of the Russian
Federation that came into force on January 1, 2006.
1.1
Taxes on inheritance
1.1.1 Personal income tax
The income that was received as inheritance should not be taxed with personal income tax (“PIT”) in Russia
in most of cases (clause 18 art. 217 of the Russian Tax Code).
However it is taxed if a successor acquires:
• the consideration received on a literal work;
• payment in favour of the creator of scientific work;
• payment in favour of the creator of a piece of art;
• award to the inventor or creator of industrial design.
The tax base (art. 210 of the Russian Tax Code) for such objects of taxation is defined as:
• for Russian tax residents: the monetary value of income reduced by tax deductions provided by the
Russian Tax Code;
• for Russian tax non-residents: the monetary value of income from Russian sources.
The point in time the tax base is recognised is the end of the PIT tax period (December 31 of the respective
year). The income should be recognised at the moment of its actual receipt.
There are separate tax rates for Russian tax residents and Russian tax non-residents: 13% respectively 30%.
When the successor possesses or disposes the estate (e.g. selling it or gaining the interest or dividends on
the inherited estate) he receives the income which is taxed with personal income tax.
General tax exemptions are also applicable in the case of owning the inherited real estate:
• Income received by Russian tax residents from the sale of a dwelling (e.g. apartment, house) which has
been owned by a taxpayer for more than three years is exempt from PIT.
• The tax deduction is also granted when the successor sells such dwelling which has been owned for less
than three years to an amount up to RUB 1,000,000 and other property (except for securities) up to RUB
250,000.
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1.1.2 Stamp duty
The stamp duty which is a federal fee should be paid for the confirmation of the successor’s rights on
inheritance, i.e. issuing the certificate of inheritance rights before such confirmation (subclause 3, clause 1,
art. 333.18 of the Russian Tax Code).
Every successor is liable for payment of the stamp duty. The prescribed amount of the stamp duty is
determined as following (subclause 22 paragraph 1 art. 333.24 of the Russian Tax Code):
• For children, including adopted children, spouse, parents, siblings of the testator – 0,3% of the monetary
amount of inherited property, but not greater than RUB 100,000;
• For other successors – 0,6% of the monetary amount of inherited property, but not greater than RUB
1,000,000.
The above stated maximum amount of the stamp duty for issuing the certificate of inheritance rights is meant
to be applied to each piece of inherited property for which a certificate is issued; but such stated maximum
amount does not apply to the whole amount of inherited property.
If inherited property does not consist of money, then the monetary amount of the stamp duty is estimated on
the basis of an appraiser’s report (except for immovable property, vehicles and land whose value is estimated
according to the value of identical property on the date of passing the inherited property).
There are also several types of individuals exempted from stamp duties.
1.1.3 Inheritance tax
The inheritance tax in Russia has been abolished since January 01, 2006. Clause 18 art. 217 of the Russian
Tax Code specifically provides that the successor does not pay PIT on the received inherited income.
However, according to the Russian case law inheritance tax is imposed on the inheritance that opened
before January 1, 2006, because the inheritance tax was calculated and was supposed to be paid at the
date of inheritance opening.
The day of the testator’s death is recognised as the date of inheritance opening. The Civil Code of the
Russian Federation provides that for tax purposes the date of an inheritance opening is important, as
inherited property is recognised as belonging to a successor since the date of inheritance opening regardless
of the time of its actual acceptance and regardless of the date of state estate registration if such a right is
subject to state registration (clause 4 art. 1152 of the Russian Civil Code).
This provision means that if a person accepts the inheritance today which for some reasons has not been
accepted yet and which was opened before January 1, 2006, then this person has an obligation to pay the
abolished inheritance tax. This situation is very rare nowadays, because the majority of such inheritances has
already been accepted in the previous 9 years. As mentioned above, this is not stipulated by law but such
treatment can be learnt from Russian case law.
1.1.4 Personal property tax, land tax and transport tax
The inherited property is subject to property tax, land tax and transport tax if it is considered an object of
taxation of these taxes in the Russian Federation at the time when possessed by a successor. There are no
special provisions and differences between taxation of the inherited property compared to property received
in another way.
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1.2
Taxes on gifts
This tax has been abolished in Russia since January 1, 2006.
1.2.1 Personal income tax
Immovable property, vehicles, shares, participation interest and stocks received through the donation
(granting) are exempt from PIT if the grantor and receiver are members of a family and (or) close relatives,
i.e. spouses, parents and children, including adoptive parents and adopted children, grandparents and
grandchildren, siblings, half-siblings (having a common father or mother) (clause 18.1 art. 217 of the Russian
Tax Code).
Other income received from individuals through donation (granting) is exempt from PIT irrespective of
whether the grantor and receiver are relatives.
If the above condition for exemption of a gift from PIT are not met, then the standard deduction of an amount
of RUB 4,000 from the gift value is stipulated by the Russian Tax Code. Excess amount is taxed at the
general PIT rate (13% for tax residents, 30% for tax non-residents). There is also a deduction of an amount of
RUB 10,000 from the value of a gift provided by the Russian Tax Code to several categories of PIT taxpayers.
It should be noted that when an individual is gifted in kind (non-monetary) by a company the market price
should be estimated in accordance with the provisions of art. 105.3 of the Russian Tax Code (“General
provisions on taxation of deals between related parties”). And this non-monetary income is taxed accordingly
(13% for tax residents respectively 30% for tax non-residents).
1.2.2 Personal property tax, land tax and transport tax
The gifted property is subject to property tax, land tax and transport tax if it is considered an object of
taxation of these taxes in the Russian Federation at the time when it is possessed by a receiver. There are
no special provisions and differences between taxation of the gifted property compared to the other ways of
property obtaining.
1.3
Rules of evaluation
Such property should be measured at the market value of immovable property, vehicles and land property
for PIT purposes. The market value may be estimated by the parties of the donation contract and should be
included into such agreement. For such purposes an independent appraiser may be engaged. However, it
should be taken into consideration that for the purposes of personal property tax and land tax the value of
real estate should be cadastral.
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B.
Civil law
1.
Under the Russian Civil Code, under a donation agreement a donor transfers a gift to the receiver free of
charge. The receiver may however reject to accept the gift.
Generally, a donation agreement can be executed in an oral form – in case it is supported by the actual asset
transfer. However, a donation agreement shall be executed in writing in case (i) it is executed with respect to
a gift whose price exceeds RUB 3,000 (approximately EUR 40) or (ii) it refers to a future donation. A donation
agreement with respect to real estate assets is subject to the state registration.
A gift agreement providing for an asset transfer after the donor’s death is treated as invalid under Russian
law.
2.
The basic principles of Russian inheritance law are the freedom of will and the right of succession to relatives.
In Russia, the right of succession is a subjective right which protects the dispositions of the testator’s assets
and rights.
2.1
The testator’s estate is defined based on the principle of universal succession, i.e. the property owned by
the testator on the date of opening of the inheritance consists of all the assets and liabilities owned by the
testator. The assets and liabilities are transferred jointly. Rights and liabilities are inseparably linked with the
person of the testator.
Besides the right of succession by relatives, there is the right of inheritance of the surviving spouse. The
share of the deceased spouse in the matrimonial property is viewed as a part of the estate. The rules and
procedures of inheritance by spouses is established by the Russian Civil Code.
If a deceased has not issued his/her will, a complex statutory order of intestate inheritance shall apply which
provides for the eight priorities of heirs-in-law. The heirs of the respective next priority pretend to own the
testator’s estate in case there are no heirs of the preceding priority (or if all of them waived their rights to
inherit).
The eight priorities are as follows:
• First priority: children, spouse and parents of the testator.
• Second priority: full and half brothers and sisters of the testator, grandfather and grandmother (both on
the father’s and mother’s side).
• Third priority: uncles and aunts of the testator.
• Fourth to eight priority: heirs-in-law are defined as relatives not covered by the previous priorities
(stepchildren, stepparents, parents-in-law etc.).
In case there are now heirs-in-law at all, the testator’s estate will be acquired by the Russian Federation.
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2.2
The Russian Civil Code provides that a testator may control his succession by making a will only. Any person
having unlimited legal competence may make a will. Russian inheritance legislation prescribes that a will shall
be made in written form and requires a notary verification.
2.3
2.3.1 Last will
A last will constitutes a unilateral universal disposition of the testator mortis causa. The last will may comprise
several types of forms and orders. The central type of order is the appointment of heirs. The deceased can
create a will for the benefit of one or several persons which are or are not his/her legal heirs. Further forms
include legacies, provisions for the execution of the will and orders for the division of the estate. In Russia the
will shall be created in person. The will cannot be created through a representative. Moreover the will shall
contain dispositions of only one citizen. The will shall not be created by two citizens or more. The deceased
shall be entitled to leave by will at his/her discretion property to any persons, to set heirs’ shares in the
estate in any way, to deprive one, several or all legal heirs of inheritance without indicating reasons for such
a deprivation and also to include other dispositions in the will in compliance with the rules of the present Civil
Code concerning succession, to revoke or alter his/her created will. The freedom of the will shall be limited
only by the rules of compulsory share of estate.
Russian law does not recognise a concept of testamentary contracts. Testamentary disposition can only be
made in a form of will.
2.4Legacy
If a testator wants to provide a person with a pecuniary advantage without appointing him/her as a heir, he/
she may do that by leaving him/her a legacy. In contrast to the heir, the legatee does not become a universal
successor. He/she just has a claim vis-a-vis the heirs to the object left to him/her. The legacy shall be
ordered in a will. Every pecuniary advantage may form the object of the legacy. The object of the legacy can
be transferred to a beneficiary into his/her ownership, possession by another right in rem or use of an item
incorporated in the estate, transfer to a beneficiary of an item in action incorporated in the estate, acquisition
for a beneficiary and transfer thereto of another property, performance of specific work for him/her or the
provision thereto of a specific service or the making of periodical payments for his/her benefit etc.
The right to receive a legacy shall be in effect for a three-year term after the date of opening of an inheritance
and shall be non-transferable to other persons. However, an alternate beneficiary may be appointed together
with a beneficiary in cases when the beneficiary dies before the opening of the inheritance or simultaneously
with the testator or refuses to accept the legacy, did not exercise his/her right to receive the legacy or is
deprived of the right to receive the legacy in accordance with the provisions of the Russian Civil Code.
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2.5Conditions
In general, Russian inheritance law does not provide for a concept of allowed burden over the inherited
assets.
2.6Usufruct
In order to protect oneself or the spouse in the case of gifts, e.g. gifts to children, the donor may reserve the
usufruct on certain parts of the assets for himself/herself or other persons. The usufruct is comprehensive
and thus completely bars the owner from the use and possession of his/her object. This means that the
usufructuary has the full right to the fruits, usage and advantages of use of the object. At the same time, the
usufructuary is also obliged to maintain the economic condition of the property.
2.7
Testamentary dispositions are subject to certain form requirements. The most important type of testament is
the handwritten will that is created by the testator himself/herself in writing and then signed. A will shall also
be recorded by a notary.
Russian law does not recognise a concept of testamentary contracts.
2.8
Russian inheritance law does not provide for the concept of statutory share as it is determined by laws of
European countries.
2.9
The concept of trusts is not recognised by the Russian civil and tax legislation. The incomes received by
individuals from foreign (non-Russian) trusts are recognised as ordinary income received from a foreign
source.
It is important to note that pursuant to the newly implemented CFC rules, starting January 1, 2015, the
beneficiary owners, settlors and controlling parties in Russia (being Russian tax residents) shall notify the
state tax authorities of their participation in the foreign family foundations and trusts.
Under the Russian Civil Code, a will shall be executed by a testator personally in a written form and shall be
verified by a notary. Execution of a will by a testator’s representative is forbidden. Failure to comply with these
requirements to the form of a will leads to invalidation thereof. Technically a will may be written by a testator
personally or by a notary in the testator’s presence.
A testator may appoint a citizen to effect a will (“executor in a will”). An executor shall agree in written form to
act in this role. Generally the executor’s function is to take necessary actions to execute a will. In this role an
executor is empowered to take measures to protect the assets and transfer it to the successors, receive the
money and other assets for further transfer to the successors etc. An executor is also empowered to ask for
compensation of his/her respective expenses.
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3.
Law on succession
There is no separate legislative act providing for the complex rules of succession in Russia. The inheritance
relations are governed by the Russian Civil Code. Procedural aspects of succession are regulated by the
Fundamental Legislation of the Russian Federation on Notarial System. These rules and regulations are
mandatory for the Russian citizens and those foreigners having assets on the territory of Russia.
In general, there are two types of inheritance: (i) testamentary inheritance and (ii) intestate inheritance.
Testamentary inheritance assumes a will of an individual. An intestate inheritance is given in the absence of a
will and in some other statutory cases.
The deceased’s estate incorporates the assets and property the deceased owned as of the date of opening
of the inheritance, including jointly the property rights and liabilities. It is important to note that the rights and
liabilities inseparable from the person of the deceased, personal incorporeal rights and other intangible assets
are not included in the estate.
Russian law also regulates the regime of inheritance of assets of the Russian citizens living abroad owning
assets located abroad (unless the law of the other country contains special provisions for assets located on
the other country’s territory).
136
Spain
A.
Tax law
1.
1.1 Taxable event
Inheritance and gift tax payment is directly transferred to the seventeen different Spanish regions
(“Comunidades Autónomas”). Therefore, although the general regulations are laid down in the National
Inheritance and Tax Law, Law 29/1987 and Royal Decree 1629/1991, each region has got their own
regulation concerning, mainly, tax rates, deductions and benefits.
The tax applies to earnings by inheritance (“mortis causa”) or donation (“inter vivos”) made towards
individuals, and pecuniary advantages due to life insurances if the receiver is not the same person as the
contractor of the insurance.
The processes of tax formation are determined in principle by the Spanish Civil Law, although Basque
Country and Navarra regions have got their own regulation.
1.2 Taxable person and taxable assets
Tax liability is linked to the persons forming part of the transfer and the place where the goods transferred are
located.
It applies if the tax payer is a Spanish resident according to the personal income tax rules.
The tax rules to be applied will depend on the following possibilities:
Tax law to be applied
“Mortis
causa”
acquisitions
Deceased Spanish tax
resident
Tax law of the region where the deceased stayed in the most
number of days the five years period before his/her death
Deceased non-Spanish
tax resident
National law, as the general rule
If the deceased is resident in another EU country, the rules
of the region where the most of the goods and rights are
located apply
If there is not any good located in Spain, each tax payer will
pay tax according to the region where he/she lives
Real estate
donations
Other
donations
Buildings located in Spain
Tax law of the region where the building is located
Buildings located outside
Spain
National law, as the general rule
If the goods are located in another EU country, the respective
regional tax law of each tax payer applies
Tax law of the region where the donor stayed in the most number of days on the period of
five years prior to the donation
137
1.2.2 Limited tax liability in case of domestic assets
It applies if the tax payer is a Spanish non-resident according to the Spanish personal income tax:
Tax law to be applied
“Mortis
causa”
acquisitions
Real estate
donations
Donations of
other goods
Deceased Spanish tax
resident
If the tax payer is tax
resident of another
EU country
Tax law of the region where
the deceased stayed in the
most number of days of
the five years period before
his death
If the tax payer is
non-EU resident
National law
Deceased non-Spanish tax
resident
Buildings located in Spain
Tax law of the region where
the building is located
If the tax payer is tax resident
in another EU country
Tax law of the region where the building is located
If the tax payer is non-EU
resident
National law
If the tax payer is tax resident
in another EU country
Tax law of the region where the goods have been located
most days in the five year period prior to the donation
In case that the tax payer is
not a EU resident
National law
1.3 Maturity of taxes
In case of acquisitions “mortis causa”, tax arises upon death of the testator, and the deadline to submit the
tax return is six months after.
In case of gifts “inter vivos” the tax arises at the time such gift is accepted or given. There is one month time
to submit the tax.
1.4 Calculation of the taxable acquisition
In the case of tax on transfers mortis causa, such taxable acquisition will be calculated individually for each
tax payer and not jointly with the others.
There are some assets that should be added to the taxable acquisition:
• Those that belonged to the deceased one year before his/her death, unless it can be proved that they
were transferred to persons despite the heirs, legatees, or blood relatives upon third degree.
• Goods and rights onerously acquired by the deceased in the three years period prior to his death, under
the following conditions:
– The deceased retained the usufruct of the good or right;
–The bare ownership of the good or right was transferred to his/her heirs, legatees, spouse, or blood
relatives upon third degree.
138
• Goods and rights transferred by the deceased in the four years period prior to his death, when he
reserved:
− usufruct of the transferred assets;
− usufruct of any other asset of the acquirer;
− any other property laws;
− any endorsed commercial bills that were not charged before the decease.
Debts, charges and some expenses will be deducted from the tax base.
In the case of tax on acquisitions “inter vivos” the tax base is composed by the addition of the goods and
rights transferred deducting several charges and debts.
1.5 Rules of valuation
The transferred assets should be valued according to their “market prices”.
The different regions usually provide a list with the prices of each real estate unit, and for other assets such
as cars, yachts, etc.
The valuation of shares of companies, not taken into consideration the public ones, is obtained by adjusting
the net accounting value of the assets of the company by the market value of each asset.
1.6 Tax exemptions
Tax law does not provide any tax exemption, although it protects the acquisition of “family businesses” and of
the dwelling that used to be the residence of the deceased, with an exemption of 95% of its value.
1.7 Tax-free amounts/preferential treatment of business assets
There is a tax-free amount in case of the acquisition of what is called “family business” up to 95% of the
value of the assets that are related to that economic activity, either if the acquisition is mortis causa or inter
vivos.
Conditions that should be met to apply this benefit in case of acquisitions mortis causa:
• The acquisition should be done in favour of the spouse, direct or adopted descendants. In case that there
are no descendants or adopted descendants it could also be done by descendants, adopted or other
relatives up to third degree.
• The acquirer should maintain the acquisition ten years after the death of the testator, unless he/she dies in
that period.
• The acquirer cannot make any disposal or business that could reduce the value of the assets transferred.
• Conditions that should have been met by the deceased:
− that the activity was developed by him/her personally, directly and habitually;
− that the activity used to be his/her main source of income.
139
Conditions that should be met in case of an acquisition inter vivos:
• Conditions to be met by the donor:
− that the activity was developed by the donor personally, directly and habitually;
− that the activity used to be his/her main source of income;
− the donor should be older than 65 years old or disabled in a certain degree.
• Conditions to be met by the donee:
− The acquisition should be done in favour of the spouse, direct or adopted descendants.
−The donee should maintain the acquired assets for ten years from the time of donation of the
business, unless he/she died in that period.
− The donation should be done before a public notary in a deed.
−The donee should develop the activity personally, directly and habitually from the moment of its
donation, and such donation should be his/her main source of income for the next ten years.
The same exemption is also obtained when shares in “family companies” are transferred, under several
conditions:
Conditions that should be met to apply this benefit in case of acquisitions mortis causa:
• that the company does not develop the sole activity by managing real estate or financial assets.
Therefore, the company will have to have met for a minimum period of 90 days in the previous tax year
− Less than half of the assets of the company should not be shares in other companies.
−More than half of the assets’s value of the balance sheet of the company should be based on an
economic activity.
• that the deceased used to have more than 5% of the shares in the company at the moment of decease,
or 20% jointly with his/her spouse, direct or adopted descendants, or his/her collaterally related family up
to second degree.
• The acquisition should be done in favour of the spouse, direct or adopted descendants. In case that there
are no descendants or adopted relatives it could also be done in favour of descendants, adopted or other
relatives up to third degree.
• The acquirer should maintain the acquisition for ten years from the death of the testator, unless he/she
dies in that period.
• The acquirer cannot make any disposal or business that could reduce the value of the assets transferred.
• Conditions that should have been met by the deceased:
−that the deceased used to be director of the company or rendered any leadership function in the
company;
−that the leadership role in the company provided him/her with earnings that used to be his/her main
source of income.
140
Conditions that should be met in case of an acquisition inter vivos:
• that the company does not develop the sole activity by managing real estate or financial assets.
Therefore the company will have to have met for a minimum period of 90 days in the previous tax year,
− Less than half of the assets of the company should not be shares in other companies.
−That more than half of the assets’s value of the balance sheet of the company should be basedon an
economic activity.
• that the donor used to have more than 5% of the shares in the company at the moment of the donation,
or 20% jointly with his/her spouse, direct or adopted descendants or his/her collaterally related family up
to second degree.
• The acquisition should be done in favour of the spouse, direct or adopted descendants.
• The donee should maintain the acquisition for ten years after the donation date, unless he/she dies in that
period.
• The beneficiary cannot make any disposal or business that could reduce the value of the assets
transferred.
• Conditions that should be met by the donor:
− The donor should be older than 65 years at the moment of the donation.
−The donor used to be director of the company or rendered any leadership function in the company,
and rejects his/her charges.
−The leadership role in the company provided him/her with earnings that used to be his/her main
source of income.
1.8 Tax-free amounts/preferential treatment of real estate
There is a 95% deduction of the value of what used to be the last residence of the deceased, with a
maximum amount of EUR 120,202.42 per beneficiary, when the acquisition is kept unsold for a 10 years
period starting with the decease.
1.9 Personal allowances
Acquirers may be granted personal allowances in dependence on the degree of kinship to the testator/donor
and are divided into the following tax classes:
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Group number
Degree of kinship
Group I
Descendents and adopted relatives younger than 21
years old
Personal allowance (EUR)
For each year below 21 years old
Group II
Group III
3,990.72
Maximum allowance
47,858.59
Descendants and adopted relatives of 21 years or older
15,956.87
Spouse, ascendants and adopted relatives
15,956.87
Collaterals of second and third degree
7,993.46
Ascendants and descendants by marriage
7,993.46
Others
Group IV
15,956.87
Without any allowance
It should be taken into consideration that each region has changed the amount of this personal allowance to
be deducted, so it can differ in each case.
The information given above refers to the state tax law.
1.10 Tax rates
The tax rate is progressive and it will be multiplied depending on the group number that belongs to the tax
payer and the wealth that the acquirer had before the inheritance or donation.
Each region has ruled their tax rates as well independently.
The state tax rates are:
142
Tax base up to EUR
Tax amount in EUR
Rest of tax base in EUR
Tax rate (%)
0.00
0.00
7,993.46
7,65
8,50
7,993.46
611.50
7,987.45
15,980.91
1,290.43
7,987.45
9,35
23,968.36
2,037.26
7,987.45
10,20
31,955.81
2,851.98
7,987.45
11,05
39,943.26
3,734.59
7,987.45
11,90
47,930.72
4,685.10
7,987.45
12,75
55,918.17
5,703.50
7,987.45
13,60
63,905.62
6,789.79
7,987.45
14,45
71,893.07
7,943.98
7,987.45
15,30
79,880.52
9,166.06
39,877.15
16,15
119,757.67
15,606.022
39,877.16
18,70
159,634.83
23,063.25
79,754.30
21,25
239,389.13
40,011.04
159,388.41
25,50
398,777.54
80,655.08
398,777.54
29,75
797,555.08
199,291.40
moving forward
34,00
The amount that will result from the application of the tax rates will be multiplied by:
Previous wealth in EUR
Group
Group I and II
Group III
Group IV
Up to 402,678.11
1.0000
1.5882
2.0000
From 402,678.11 to 2,007,380.43
1.0500
1.6676
2.1000
From 2,007,380.43 to 4,020,770.98
1.1000
1.7471
2.2000
From 4,020,770.98
1.2000
1.9059
2.4000
1.11 Setting-off/exemption
Different regulations of the countries regarding inheritance and donation taxes can make this tax to be due
to be paid twice. In order to mitigate this effect countries conclude double taxation agreements or apply
deductions on the tax already paid abroad.
The law states this mechanism for Spanish tax residents and with the limit of:
• the amount of inheritance tax paid abroad; or
• the result to multiply the medium tax rate of the Spanish tax by the amount of the value of the assets that
were already taxed abroad.
There are also some exemptions for the assets acquired in Ceuta and Melilla (African colonies). And, of
course, each region has stated other exemptions that could go up to 99% of the tax to be paid, as for
example in the Madrid region. All this has made the tax due to be completely unequal for the Spanish, and
on the other hand it has promoted the change of residency of people foreseen a tax saving.
2.
Wealth tax
Wealth tax is calculated on the value of the assets of the tax payer. It is also a tax transferred to the different
Spanish regions, and each region has its own rules. It should be paid in some regions when the net assets
are exceeding EUR 700,000. In other regions, like the Madrid region, it should be submitted, when the figure
of net assets is exceeding EUR 2,000,000, but it is tax exempt. It is just submitted for control purposes.
3.
Spain has signed double taxation agreements regarding inheritance and gift tax with:
• Greece, on March 6, 1919;
• France, on January 8, 1963;
• Sweden, on April 25, 1963.
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4.
4.1 Expatriate
Those Spanish residents that change their tax residence to another country that is classified as a “tax haven”
will remain being considered as Spanish residents for tax purposes. When a Spanish resident is sent abroad
to work in a company located in another country, or to provide professional services to group companies,
he/she might, under several conditions, be tax exempt for the earnings obtained due to that displacement,
with a limit of EUR 60,100 per year.
4.2 Taxation of pensions and retirement benefits
Taxation and retirement benefits obtained by a non-resident in Spain, when derived from a domestic pension
insurance institution, will be the result of applying the following rates:
Annual pension in EUR
0.00
From 12,000 to 18,700
From 18,700
Tax amount EUR
Rest of pension
up to EUR
Tax (%)
0.00
12,000
8%
960.00
6,700
30%
2,970
moving forward
40%
4.3 Consequences of income tax, especially in the case of a relevant share holding in a
corporation
According to the Spanish internal rules it will be considered that the capital gains are obtained in Spain if:
• The gains are due to shares issued by a Spanish entity, or if
• the gains arise from other assets located in Spain or of rights that should be executed in Spain, or if
• there is an enrichment of the person which is non-resident in Spanish territory due to goods or rights that
should be executed in Spain, such as the gains on gambling.
There are several exemptions to the said rules:
• Gains obtained by other EU residents, except when the tax payer’s residency is in a tax haven, when the
company sold is a “real estate owner company”, or when he/she has got more than 25% of the equity.
• Capital gains of shares issued in Spain received by non-Residents.
• Capital gains on public companies shares sold, when the seller is tax resident in a country which has
concluded an information exchange treaty with Spain.
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B.
Civil law
1.
According to Spanish Civil Law, the donation is a “generosity act, in which one person disposes freely of
something in favour of someone else, who accepts it”. It is necessary then that the donation is accepted,
and it is mandatory to be notarised in case that the good transferred is a real estate asset. Nevertheless in
order to fulfil several tax conditions concerning exemptions, it is mandatory to notarise donations. The gift
may also be subject to some conditions to be met by the beneficiary.
2.
The decision to transfer assets or rights of the testator mortis causa should be laid down in a will.
Nevertheless, there are some groups of relatives that are what it is called “heirs at law” that should always be
considered.
2.1
If the deceased did not make a will, the heirs will be, in this order:
• descendants: children and their descendants, marital, extra-marital or adopted;
• ascendants;
• spouse, who will take part with descendants;
• siblings, nephews and nieces;
• collaterals up to fourth degree;
• the state.
If the deceased made a will, the heirs will be the ones he desired, but respecting the portion that will have to
be transferred to the “heirs at law”:
• in case of existing descendants:
– 1/3 of the net assets of the deceased should be split between the descendants.
–1/3 of the net assets of the deceased could be awarded to his/her children freely, so one of them
could be put in a better position as the others.
• in case of not existing descendants, the ascendants will become the “heirs at law”, on the following portion:
− 1/2 of the net assets if there is no spouse.
− 1/3 in case of spouse.
• Spouse as “heir at law” in this cases:
−If there are children and descendants, he/she will have to be transferred 1/3 of the usufruct of the goods.
−If there are no children or their descendants, but there are ascendants, he/she will be considered with
1/2 of the usufruct of the goods.
−If there are no children, nor their descendants, nor ascendants, he/she will be considered with the
usufruct of 2/3 of the goods.
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2.2
A testator may control his/her succession by making a will. Civil Law states different kinds of wills.
2.3
2.3.1 Last will
Last will is defined by the Spanish Civil Law as the “formal exposition of what we want to be done after
our death”. It is an individual action so it cannot be done jointly with others. It is a personal action so it is
protected from being known by third persons. It is a formal action which has got some conditions to be valid.
It can be revoked. It is a free action from the testator.
This is not something used in Spain.
2.4Legacy
Sometimes the testator wants to provide a person with a pecuniary advantage without appointing him/her as
heir. He/she is not a universal successor, and will have to claim the legacy to the rest of heirs. The legacy can
never reduce the part of the heritance that correspond to the “heirs by law”, and will have to be subtracted in
the case that this happens.
2.5Conditions
It is quite usual that the testator protects one of the heirs by allowing him/her to decide between a couple of
possibilities, or portions to be granted. Usually the heir protected is the spouse. In these situations the other
heirs will be threatened by reducing their part of the estate if they refuse to allow the person protected to
decide which part he/she wants.
2.6Usufruct
By maintaining the usufruct of the goods transferred, the donor has full rights of the fruits and use and
possession of the gift until his/her death. It also enables the testator to ensure that his/her spouse is not
going to be rejected from his/her house by the rest of heirs, just transferring him/her the usufruct.
2.7
The wills can be:
• public wills which are made before a notary, a civil servant, a judge, or an ecclesiastic servant;
• private wills which should be handwritten;
• mixed wills which are handwritten wills done before third parties, not civil servants.
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2.8
As it was explained before in paragraph 2.1 “heirs by Law” have got the right to a statutory share which is a
minimum amount to be received.
2.9
Spanish Civil Law allows, in case that the testator expressly determines it in the will, that a trust could
substitute the heir in some cases (e.g. children under 14 years old when the testator dies or disabled children
over 14 years old). The trust will be just a mere vehicle to transfer the assets to the heirs when the conditions
that were made therein to assure that the trust receives the goods are met.
The testator may designate an executor in his/her will, who usually will decide about the final division of his/
her heritance in case of disagreement.
3.
According to Spanish Civil Law, “it should be applied the law on succession of the country of the nationality
of the deceased, no matter what or where the transferred assets are”. If the deceased is a foreigner his/her
heritance will be ruled under his/her respective national law. The will is valid whenever it accomplishes to the
conditions of the country where it is done, or to the Spanish law.
Nevertheless, the general rule changed as of August 17, 2015. Now the EU Regulation on succession is
appicable. See general description as outlined on page 4 which also applies to Spain.
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Switzerland
A.
Tax law
1.
1.1
Basic information
The 26 cantons of Switzerland are free to levy such tax and the various cantonal laws differ considerably in
almost every respect. With the exception of the Canton of Schwyz all cantons levy inheritance and/or gift taxes.
Inheritance and gift tax as set out below is based on the law of the Canton of Zurich. Seeking tax advice for
individual situation is strongly recommended.
1.2
Taxable event
Inheritance tax is levied on the transfer of assets based on civil inheritance law or based on testaments in
connection with the decease of a person (“mortis causa”). Furthermore, insurance payments becoming due
upon the decease of a person are also subject to inheritance tax.
Gift tax is levied on inter vivos transfers of assets from one person which enrich another person. This includes
the transfer of assets to a trust, Stiftung, etc. Furthermore, insurance payments in favour of another person
are also subject to gift tax.
1.3
Unlimited tax liability is linked to the tax domicile of the deceased/the donor. The tax liability is imposed on
the beneficiaries. However, the donor is liable for such tax together with the respective beneficiaries.
Limited tax liability applies if the deceased/the donor has had his/her tax domicile outside of the canton but
transferred real estate or rights therein are located in the canton. However, shares in real estate companies
do not trigger limited tax liability. The tax liability is imposed on the beneficiaries. However, the donor is liable
for such tax together with the respective beneficiaries.
1.3.3 Exemption from tax liability
Spouses, registered partners and descendants from the deceased/the donor (children, grand children) are
exempted from taxation. Exemption from taxation also applies to charitable organisations.
1.4
Maturity of taxes
In the case of acquisition mortis causa, tax generally arises upon death of the testator. In the case of gifts
inter vivos, the tax arises at the time the gift is effected. Thus, a mere promise of a gift does not result in
the formation of taxes. Rather, the point of time at which the donee received the gift and was enriched is
decisive. Taxes have to be paid within 30 days after receipt of the tax assessment.
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1.5
Calculation of the taxable acquisition and rules of valuation
The basis for the calculation of the tax is the fair market value of the taxable transfer (assets less liabilities).
The law does not provide specific regulations for determining the fair market value; in practice expert’s
valuations are common.
1.6
Tax exemptions
Occasional gifts up to CHF 5,000 each are tax exempted in the Canton of Zurich.
1.7
Preferential treatment of business assets
According to Zurich tax law, an 80% reduction in the tax burden is available if business assets located in
Switzerland are transferred.
1.8
Tax calculation/tax rates
The applicable tax rates vary from canton to canton. The rates are typically (the most prominent exception
is the Canton of Geneva) identical for inheritance and gift tax. In most cantons the rates are progressive and
also depend on the relationship between the transferees and the transferor.
Tax calculation in the Canton of Zurich:
Basic tax:
First
CHF 30,000
2%
Following
CHF 60,000
3%
Following
CHF 90,000
4%
Following
CHF 180,000
5%
Following
CHF 480,000
6%
Following
CHF 660,000
7%
CHF 1,500,000
6%
Exceeding
Surcharges on the basic tax depending on the relationship between transferees and transferor:
Parents
1 x basic rate
Grandparents, stepchildren
2 x basic rate
Siblings
3 x basic rate
Step-parents
4 x basic rate
Uncle, aunt, dependents
of siblings
5 x basic rate
Others
6 x basic rate
Consequently, the maximal tax rate amounts to 36%.
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1.9
Switzerland has concluded bilateral double taxation agreements (“DTAs”) only with respect to inheritance tax
with the following countries:
• Austria;
• Denmark;
• Finland;
• France;
• Germany;
• the Nederlands;
• Norway;
• Sweden;
• United Kingdom; and
• the USA.
2.
Wealth tax
In Switzerland, all cantons levy a net wealth tax based on the balance of the worldwide gross assets minus
debts. Assets to be reported are as follows:
• bank account balances, bonds, shares, funds and other equities;
• life insurances with a surrender value;
• cars, boats, airplanes etc;
• properties/real estate;
• other valuable assets, e.g. paintings, art collections, jewellery etc.
The fair market value of such assets is subject to taxation; consequently, some assets are subject to
depreciation, which is considered for wealth tax purposes but cannot be claimed as a deduction for income
tax purposes. Leased assets are not considered for wealth taxation. Movable assets are deemed to be
located at the place of tax residence in Switzerland and therefore subject to wealth taxation in Switzerland.
Properties abroad are only considered for tax rate determining purposes, but are exempted from actual
taxation in Switzerland.
Worldwide debts (e.g. mortgages or other loans) are deductible without applicable cap. If assets are located
abroad, the total debts are subject to an international allocation in proportion to the allocation of the total
gross assets. Household goods are not subject to wealth taxation.
The tax rates are progressive and depend on the place of tax residence and therefore vary heavily between
communities and the actual amount of net wealth. For instance net wealth of CHF 10,000,000 is subject to a
net wealth tax between 0.11% in Hergiswil to 0.98% in Geneva.
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3.
3.1
Tax free private capital gains
Private capital gains on movable assets (e.g. shares, options, etc.) are tax free in Switzerland. However, tax
planning is required since tax authorities try to identify a taxable commercial activity instead of a tax free
private capital gain.
3.2
Lump sum taxation
For foreign nationals who take up residence in Switzerland for the first time or after ten years of absence, and
who are not employed in Switzerland, taxation based on expenditure is possible. The basis for the calculation
of taxes is not the worldwide income and wealth, but the annual expenditures incurred by the taxpayer in
Switzerland and abroad. Also the expenses of the spouse and dependent children are taken into account.
As it is often difficult to assess the annual expenditures of foreigners, Swiss law provides an individual
minimum amount based on the housing costs: For taxpayers residing in their own household, the lump sum
is fixed to an amount which is at least five times the annual rent paid (if the house/apartment is rented). For
other taxpayers, the lump sum will be fixed on at least twice the annual amount for lodging and food.
For wealth tax purposes the assessed lump sum basically will be capitalised with 5% to calculate the taxable
hypothetical net wealth.
Furthermore, no income tax return declaring all worldwide income and net wealth has to be filed.
A revised law on taxation on expenses will enter into force on January 1, 2016, which will increase the
minimum requirements at both federal and cantonal levels: income tax will then be calculated on seven
times the annual rent paid (or imputed rental value). In addition, at federal level, a minimum threshold of CHF
400,000 will apply. The cantons are required to define a minimum threshold as well, however, they may
define it at their own discretion.
3.3Expatriates
The federal expatriate regulations regarding special business expenses have been in force since January
2001. They have been adopted by most Swiss cantons, although there are cantonal variations in how the
regulations have been implemented. According to the new expatriate regulation as of January 1, 2016 only
intercompany assignees (executives and specialists) will qualify as expatriates.
The following distinction is made to establish the scope of expenses that may be reimbursed tax-free:
International assignees still resident abroad:
• travel costs between the permanent home abroad and Switzerland;
• temporary accommodation costs in Switzerland, i.e. hotel costs;
• reasonable housing expenses in Switzerland provided the international assignee retains a household in
the home country and does not rent it out.
International assignees resident in Switzerland:
• costs for the transportation of the household goods to Switzerland and back to the home country plus
travel costs for the travel of the employee and his/her family to and from Switzerland at the beginning and
at the end of the assignment;
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• reasonable housing expenses in Switzerland provided the international assignee retains a household in
the home country and does not rent it out;
• school costs for an international foreign-language school in Switzerland, if no suitable Swiss school is
available.
Any reimbursement of work-related costs of the expatriate by the employer must be declared in the
employee’s salary slip. The entitlement to benefit from the expatriate status for tax purposes ceases once
temporary employment is replaced or superseded by a permanent position.
3.4
Annuity payments are generally subject to ordinary taxation. In case of self-financed life-annuity payments,
only 40% of the payments are subject to ordinary taxation.
Special tax rates apply to capital payments paid out of qualifying private pension schemes. The rates depend
on the actual amount received and vary between communities. For instance a capital payment of CHF
1,000,000 is taxed with a tax rate of 5.7% in Appenzell and a tax rate of 16.1% in Zurich. If a capital payment
is received from a pension scheme abroad, it has to be analysed whether special tax rates are applicable.
Most Swiss DTAs (following art. 18 of the model treaty of the OECD) assign the taxation right for pensions
institution, most DTAs then shift the taxation right to the source country where the institution is seated.
B.
Civil law
1.
Lifetime asset transfers – gifts
A gift is any disposition inter vivos in which a person uses his/her assets to enrich another person without
receiving an equivalent consideration. A person who bestows an object on another person by way of a gift
may reverse the bestowal at any time before the recipient has accepted it.
A gift from hand to hand is made when the donor presents the object to the recipient. Gifts of title or rights in
rem to immovable property are not effective until such transfer is entered in the land register. The promise of
a gift is valid only if done in writing. A promise to give title or rights in rem to immovable property is valid only
if done as a public deed.
Conditions or provisos may be attached to a gift. A gift whose occurrence is made contingent on the donor’s
death is subject to the provisions governing testamentary dispositions. The donor may perform action for
fulfilment of a proviso that has been accepted by the recipient. The recipient may refuse to fulfil the proviso if
the value of the gift does not cover the expenses occasioned by the proviso and he/she is not reimbursed for
the shortfall. The donor may provide that the object given shall revert to him/her in the event that the recipient
dies before the donor does. Under certain conditions, the donor may claim for return of the gift or revoke and
invalidate a promise to give.
2.
Asset transfers upon death – succession
The law of succession regulates, among others, the order of the heirs, the options to draw up a will or a
contract of succession, the relation among the heirs as a community, and the division of the estate.
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On the death of the deceased, the estate in its entirety vests by operation of law to the heirs (“universal
succession”). Subject to the statutory exceptions, the deceased’s claims, rights of ownership, limited rights
in rem and rights of possession automatically pass to the heirs and the debts of the deceased become the
personal debts of the heirs. However, upon death of a married person also the marriage ends and the marital
property regime is dissolved. Only after the settlement of the mutual matrimonial claims among the spouses,
the estate of the deceased can be assessed.
2.1
The Swiss inheritance law groups the related heirs in a parentela system, according to which the issue of
a nearer ancestor is preferred to the issue of a more remote ancestor even if such issue is not as close in
degree. The nearest heirs of a deceased are his/her issue (descendants). Children inherit in equal parts.
Predeceased children are replaced by their own issue in all degrees per stirpes. Where the deceased is not
survived by any issue, the estate passes to the parental line. The father and the mother each inherit one half
of the estate. A predeceased parent is replaced by his/her issue in all degrees per stirpes. Where there is no
issue on one side, the entire estate passes to the heirs on the other side. Where the deceased is survived
by neither issue nor heirs in the parental line, the estate passes to the line of the grandparents. Where the
grandparents of the paternal and maternal lines survive the deceased, they inherit in equal parts on both
sides. A predeceased grandparent is replaced by his/her issue in all degrees per stirpes. If a grandparent on
the paternal or maternal side has predeceased without issue, that entire half of the estate is inherited by the
heirs on that side. If there are no heirs in either the paternal or the maternal side, the entire estate passes to
the heirs on the other side. The succession rights of relatives end with the line of the grandparents.
The hereditary title of surviving spouses and registered partners depends on with which heirs he/she must
share the estate. Surviving spouses and registered partners receive one half of the estate, where they are
obliged to share with the deceased’s issue; three-quarters of the estate, where they are obliged to share with
heirs in the parental line; and the entire estate, where no heirs exist in the parental line either.
Where the deceased leaves no heirs, his/her estate passes to the Swiss canton in which he/she was last
resident or to the commune designated by the law of that canton.
2.2
Any person who has the capacity of judgement and is at least 18 years old has the right to draw up a will
disposing in part or in full of his/her property in accordance with the limits and forms prescribed by law,
and to conclude a contract of succession as a testator. Any property in respect of which no testamentary
disposition has been made passes to the statutory heirs.
2.3
2.3.1 Last will
The last will constitutes a unilateral declaration of will by the testator with legal effect on his/her death. The
last will may comprise several types of forms and orders. The central type of order is the appointment of
heirs. Further forms include legacies, provisions for the execution of the will and orders for the division of the
estate.
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Joint wills are not provided for in the law, and their legal effect is controversially discussed. Joint wills are
therefore not recommended and each spouse should write his/her own will. However, by a testamentary
disposition, the testator may grant the surviving spouse a usufruct of the entire part of the estate passing
to their common issue. Unless otherwise provided, the usufruct confers a comprehensive right of using and
enjoying the respective object(s). This usufruct shall replace the statutory succession right due to the spouse
where the common issue are co-heirs with the spouse. In addition to such usufruct, the disposable part is
one quarter of the estate. If the surviving spouse remarries, the usufruct ceases to apply to that part of the
estate which, on succession, could not have been encumbered by a usufruct under the provisions ordinarily
governing the statutory entitlements of the deceased’s issue.
2.3.2 Contract of succession
The testator may, by contract of succession, undertake to another person to bequeath his/her estate or
a legacy to that person or a third party. He/she is free to dispose of his/her property as he/she sees fit.
However, testamentary dispositions or gifts that are incompatible with obligations entered into under the
contract of succession are subject to challenge.
2.4Legacy
The testator may bequeath a legacy to a beneficiary without naming that person as an heir. He/she may
bequeath a specific legacy or the usufruct of the whole or a part of the estate, or he/she may instruct the
heirs or other legatees to make payments to that person from the value of the estate or to release that
person from obligations. If the testator bequeathes a specific legacy but the object is not part of the estate
and no other intention is evident from the disposition, no obligation is placed on the obligor of the legacy.
2.5
Burdens and conditions
The testator may attach burdens or conditions to the disposition, the fulfilment of which may be requested
by any interested party once the disposition becomes effective. Immoral or unlawful burdens or conditions
render the disposition null and void. Where they are merely onerous to third parties or meaningless, they are
deemed not to exist. If an animal receives a bequest by testamentary disposition, this disposition is deemed
to be a burden by which the animal must be cared for according to its needs.
2.6
Remaindermen (“revisionary heirs”)
The testator is entitled in his/her dispositions to require the named heir, as provisional heir, to deliver the
estate to a third party, as remainderman. No such obligation may be imposed on the remainderman. The
same provisions apply to legacies. In all cases in which remaindermen are designated, the competent
authority must order an inventory to be drawn up.
2.7
The testator may make his/her will in the form of a public deed or in holographic or oral form. A will by public
deed is made in the presence of two witnesses by a notary public. A holographic will must be written in
the testator’s own hand from start to finish, include an indication of the day, month and year on which it is
drawn up, and be signed by the testator. Where the testator is prevented from using any other form of will by
extraordinary circumstances, he/she is entitled to make a will in oral form, subject to further requirements.
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In order to be valid, a contract of succession must meet the same formal requirements as a will executed as
a public deed. The contracting parties must simultaneously declare their intentions to the public official and
sign the deed before him/her and two witnesses.
2.8
Forced heirship and testamentary freedom
A person who is survived by issue, parents, a spouse or a registered partner may make a testamentary
disposition of that part of his/her property which exceeds the statutory entitlement of the survivor or
survivors. A person who is not survived by any such heirs may dispose of his/her entire property by
testamentary disposition.
The statutory entitlement is: for any issue, three-quarters of their statutory succession rights; for each parent,
one half of the statutory succession right; and for the surviving spouse or registered partner, one half of the
statutory succession right. The disposable part is calculated on the basis of the value of the deceased’s
assets at the time of his/her death. Inter vivos gifts are added to the estate insofar as they are subject to an
action in abatement.
2.9Foundations/trusts
The testator is entitled to bequeath all or part of the disposable portion of his/her property to a foundation for
any purpose of his/her choice. However, the foundation is valid only if it conforms to the legal requirements.
Testamentary trusts, as trusts in general, are not provided for in Swiss law. Also due to the provisions on
forced heirship, foreign trusts are not commonly used. Although Swiss law does not provide for trust law,
Switzerland ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition in the
year 2007, thus recognising foreign trusts in accordance with the Hague Convention (erga omnes).
In the will, the testator may appoint one or more persons with capacity to act to execute the will. The probate
authority shall notify these persons of the appointment ex officio and they must state whether they accept
it within 14 days of such notification, silence being deemed tacit acceptance. They are entitled to adequate
recompense for their activities.
The executors’ function is to represent the testator’s wishes and, in particular, to administer the estate,
settle debts left by the testator, distribute legacies and divide the estate in accordance with the testator’s
instructions or as required by law.
3.
3.1
Law on succession
The Swiss Federal Act on International Private Law, the Swiss code on conflict of laws, regulates in relations
between different legal jurisdictions, among others, the jurisdiction of Swiss courts or administrative
authorities, the governing law, and the prerequisites for the recognition and enforcement of foreign decisions.
The basic policies are the principle of unity of the estate and the principle of residence. The application
of international treaties always remains reserved, such as e.g. the Hague Convention on the Conflict of
Laws Relating to the Form of Testamentary Disposition, as well as several bilateral agreements with foreign
countries.
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The estate of a person having his/her last domicile in Switzerland is governed by Swiss law. However,
a foreigner may by last will or contract of succession subject his/her estate to the law of one of his/her
countries of citizenship. Such choice of law becomes void if, at the time of death, he/she no longer has been
a citizen of that foreign country or had become a Swiss citizen. The estate of a person having his/her last
domicile abroad is governed by the law to which the conflict of law rules of his/her country of domicile refer.
The law governing the estate determines what belongs to the estate, who is entitled to it and to what extent,
who bears the liabilities of the estate, which legal remedies and measures are admissible, and what the
prerequisites therefore are. However, the individual measures are carried out in accordance with the law at
the place of the competent authority, including also protective measures and the execution of the will.
For the probation proceedings and inheritance disputes, the Swiss courts or authorities at the last domicile
of the decedent have jurisdiction. The jurisdiction of a foreign state claiming exclusive jurisdiction over
immovable property remains reserved. If the decedent was a Swiss citizen with his/her last domicile abroad,
the Swiss courts and authorities have jurisdiction at the place of citizenship to the extent that the foreign
authority does not deal with the estate. If the decedent was a foreign citizen with last domicile abroad, the
Swiss courts or authorities at the place of the assets in Switzerland have jurisdiction to the extent that the
foreign authority does not deal with the estate. If the assets are located at more than one place, the Swiss
court or authority first seized has jurisdiction.
If the decedent with last domicile abroad leaves assets in Switzerland, the Swiss authorities at the place of
the assets shall order the measures required for the interlocutory protection of the assets.
3.2
New EU regulation on succession
Although Switzerland is not a member of the European Union, the EU regulation on succession is of
relevance for EU nationals domiciled in Switzerland and Swiss nationals residing in the EU. It, among others,
concerns constellations in which the deceased has been a citizen of Switzerland domiciled in the EU, in
which a EU national with last domicile in Switzerland subjected the estate to the law of his/her EU member
state of citizenship, and if parts of the estate of the deceased with last domicile in Switzerland are located in
one or more EU member state(s).
Accordingly, estate planning in Switzerland requires careful consideration of such EU Regulation in cases
which relate to the EU. With regards to the content of the Regulation, please see the general description as
outlined on page 4. Although creating uniform principles among the participating EU member states, the EU
Regulation does not eliminate conflicts of law in relation to third states with regards to jurisdiction and the
applicable law. It remains to be seen if the case law will provide respective answers and solutions.
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United Kingdom
A.
Tax law
1.
Inheritance Tax
1.1
Taxable event
The fundamental regulations concerning inheritance tax are laid down in the Inheritance Tax Act 1984 (“IHTA
1984”). Inheritance tax (“IHT”) is a tax on chargeable transfers made by an individual during his/her lifetime,
on the value of his/her estate on death and on certain transfers into and out of trusts. A chargeable transfer is
any transfer of value made by an individual which is not an exempt transfer. A transfer of value is a gratuitous
disposition made by a person resulting in the reduction in the value of his/her estate.
Therefore, the charge to IHT arises:
• where an individual makes a chargeable lifetime transfer or deemed transfer of assets;
• where the deceased leaves assets which formed part of his estate immediately before death;
• where an individual dies within seven years of making a potentially exempt transfer (“PET”);
• on settled property (in certain circumstances);
• where property is disposed of subject to a reservation or retention of benefit in favour of the donor, and
either the reservation is still in force at the time of the donor’s death, or was released within seven years
before his death; and
• on a disposition made by a close company to its participators.
1.2
IHT is charged on the value transferred by a chargeable transfer. A chargeable transfer is any transfer of value
by an individual or a trustee which is not an exempt transfer.
Unlimited tax liability applies to individuals who are domiciled in the UK. They are liable to IHT on all
chargeable transfers of property wherever situated (i.e. whether in the UK or elsewhere). Individuals who are
not domiciled in the UK are only liable on chargeable transfers of property situated within the UK. However, a
person who is not domiciled in the UK shall be treated for inheritance tax purposes as if he were domiciled in
the UK if he was resident in the UK in not less than 17 of the 20 years of assessment ending with the present
one, or if they had their permanent home in the UK at any time in the three years before they died. These
cases are referred to as “deemed” domicile.
If a person is domiciled in the UK, then IHT is charged on his/her death on his/her whole estate wherever
situated.
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If a person is domiciled outside the UK, IHT will be charged on his/her death, but limited to property situated
in the UK, since the rest will be “excluded property”. In such cases, the locality of assets is important.
1.3
Maturity of taxes
A transfer of value made by an individual during his/her lifetime may be either:
• chargeable;
• exempt; or
• potentially exempt.
If the transfer is chargeable, tax will be payable at the lifetime rate of 20% at the time when the transfer is
made, should the transfer take the seven-year cumulative total of gifts made over the GBP 325,000 nil-rate
band. Extra tax may be payable if the donor fails to survive for seven years. The value transferred is added to
the transferor’s cumulative total.
If the transfer is exempt (see paragraph 1.6 below), it is disregarded for IHT purposes. If a transfer of value is
potentially exempt, tax will only become chargeable if the transferor dies within seven years after making the
transfer, i.e. it is assumed from the start that the transfer will eventually prove to be exempt.
From March 22, 2006, a PET is a transfer of value made by an individual which would otherwise be a
chargeable transfer but for the fact that it falls into various categories, which include gifts by one individual
to another. To reiterate, when a PET is made, it is assumed that it will prove to be exempt. This assumption
is maintained until it is either shown to be correct (if the donor survives for seven years) or incorrect (if the
donor dies within seven years). In the meantime, no account of it needs be delivered, and tax on subsequent
chargeable transfers is calculated on the basis that the earlier transfer was exempt.
Only transfers made on or after March 18, 1986 may be potentially exempt. Transfers made before that date
were either chargeable or exempt, as determined at the time when they were made.
1.4
IHT is charged on the value transferred by a chargeable transfer. A transfer of value is any disposition made
which results in the value of the transferor’s estate immediately before the transfer being reduced by the
transfer itself.
Generally, if there is a disposition for consideration at market value (e.g. a sale), then there will be no
diminution in the value of the transferor’s estate, and hence no charge to tax as the proceeds of sale will
satisfy the reduction in value. There may be a transfer if the sale proceeds are for less than the market value.
However, there is protection for most dispositions which lack a gratuitous element – such as unintentionally
selling an asset for less than its true value.
It should be noted that the transferor’s estate will be reduced by the tax payable on the gift as well as by
the gift itself (unless of course the transferee agrees to pay the tax). No other tax is taken into account when
calculating the loss to the transferor’s estate.
The measure of the gift is always calculated as the loss to the donor, not the amount gained by the donee.
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1.5
Rules of valuation
When an asset is transferred, its value for IHT tax purposes is calculated with reference to the amount by
which the estate of the transferor is reduced, or diminished, by the disposition. Basically, one subtracts the
value of the transferor’s estate, effected by the transfer, at the time immediately after the transfer from the
value of the transferor’s estate, effected by the transfer, at the time immediately before the transfer. Usually,
the reduction in the value of the transferor’s estate is equal to the value of the asset which the transferee
receives. However, this is not always the case. For example, it may be possible to obtain a discount in value
for any transfer of less than the whole property.
1.6
Tax exemptions
There are extensive tax exemptions for various types of disposals, e.g. gifts to charities or political parties and
gifts of pre-eminent property such as works of art.
Other exemptions include the following:
• Annual Exemption of GBP 3,000 worth of gifts given away in each tax year. Any unused annual exemption
can be carried over from one tax year to the next, but the maximum exemption is GBP 6,000.
• Wedding gifts: no Inheritance Tax on a wedding or civil partnership gift worth up to:
– GBP 5,000 given to a child;
– GBP 2,500 given to a grandchild or great-grandchild;
• GBP 1,000 given to anyone else.
• Gifts up to GBP 250; there is no IHT on individual gifts worth up to GBP 250. This exemption cannot be
used to claim a partial exemption on a larger gift.
• Regular gifts from the donor’s income: there is no IHT on gifts from a donor’s post tax income as long as
the gift does not effect the donor’s ability to maintain their normal lifestyle.
1.7
Tax-free amounts/preferential treatment of business assets
Business and agricultural property is subject to up to 100% relief, depending on the period of ownership, and
the percentage share of the business owned.
Where the donor of a lifetime gift dies within seven years after making the gift, tax (or, as the case may be,
extra tax) may become chargeable on the gift. Such tax is charged at the full rates current at the time of the
donor’s death.
Relief is available where, during the intervening period, the subject matter of the gift has fallen in value or has
been sold for less than its value at the time of the gift. In such circumstances, any tax (or extra tax) will be
calculated on the value of the property at the time of the death, or the sale price as the case may be, rather
than at the time of the gift.
1.8
Tax-free amounts/preferential treatment of real estate
When calculating business property relief, the value of excepted assets must be left out of account in the
valuation of relevant business property.
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An asset is deemed to be an excepted asset if it is not used wholly or mainly for the purposes of the
business concerned throughout the last two years before the transfer.
In order for any land or building to qualify, it must either:
• have been used wholly or mainly for the purposes of the business carried on by the company throughout
the two years immediately before the transfer; or
• have replaced another asset so used and both it and the other asset were so used for two years out of
five years immediately before the transfer.
If part only of any land or building, machinery or plant was used exclusively for business purposes, then that
part will be treated as a separate asset. Business and agricultural property is subject to up to 100% relief,
depending on the period of ownership, and the percentage share of the business owned.
The Summer 2015 Budget introduced a measure to apply an additional nil rate band for IHT where a
residence is passed on death to a direct descendant of the deceased. To qualify for the increased nil rate
band, the residence must have been the deceased residence at some point and is included in their estate.
The qualifying residential interest will be restricted to one property, but the personal representatives will be
able to nominate which property should qualify if there is more than one in the estate. A property which has
only been held for investment purposes will not qualify.
A direct descendant will be a child (including step children, adopted children and foster children) of the
deceased and their lineal descendants.
The additional nil rate band will be introduced as follows:
• GBP 100,000 in 2017 to 2018;
• GBP 125,000 in 2018 to 2019;
• GBP 150,000 in 2019 to 2020;
• GBP 175,000 in 2020 to 2021.
It will then increase in line with Consumer Prices Index (“CPI”) from 2021 to 2022 onwards. Any unused nilrate band will be able to be transferred to a surviving spouse or civil partner.
The additional nil rate band will also be available when a person downsizes or ceases to own a home on
or after July 8, 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are
passed on death to direct descendants.
There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than
GBP 2 million. This will be at a withdrawal rate of GBP 1 for every GBP 2 over this threshold.
1.9
Personal Allowances
IHT is a tax on the disposal of assets, not the acquisition of those assets. Therefore, the degree of kinship
to the testator/donor is not relevant in determining the level of tax due. Consequently, there are no personal
allowances granted to acquirers. However, inter-spouse/civil partner transfers are exempt transfers, and not
subject to IHT.
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1.10 Tax rates
The tax is payable only on the amount which exceeds the GBP 325,000 nil rate band. The following tax rates
apply:
Value of the Estate (GBP)
Percentage
0-325,000*
On amounts in excess
of 325,000*
Main rate
Reduced rate (applies if 10% or
more of estate is given to charity)
Chargeable
lifetime transfers
0
0
0
40
36
20
*A surviving spouse is able to take advantage of any unused nil rate band from their pre-deceasing spouse, and thereby extend their nil
rate band by up to another GBP 325,000 (to GBP 650,000). It was announced in the Summer Budget 2015 that the nil rate band has
been fixed at GBP 325,000 until April 5, 2021.
All lifetime transfers not covered by exemptions and made within 7 years of death will be added back into the
estate for the purposes of calculating the tax payable. This may then be reduced as follows:
Years before death
0-3
3-4
4-5
5-6
6-7
Tax reduced by (%)
0
20
40
60
80
Where a person whose estate has been increased by a chargeable transfer dies within a short period
thereafter, relief is given to prevent property being subject to two full tax charges. The percentage relief is as
follows:
Years after transfer
4-5
3-4
2-3
1-2
0-1
Tax reduced by (%)
20
40
60
80
100
Relief from IHT is given where the UK tax authorities are satisfied that an overseas territory has imposed a tax
payable on the value of property by reason of a disposition or other event, provided:
• the overseas tax is of a character similar to IHT, or is chargeable on or by reference to death or lifetime
gifts; and
• IHT chargeable by reference to the same event is also attributable to the value of the property.
It should be noted that relief is given by reference to double taxation of a particular asset, rather than of
the whole estate. Thus, where the credit available in respect of an asset exceeds the tax payable on it, the
excess cannot be set against the tax attributable to other property transferred.
Relief is only given if the overseas tax has actually been paid by the person liable to pay it. It is understood
that, in practice, relief is given provisionally where the overseas tax has not yet been paid, provided that
HMRC are satisfied that they will be able to recover anything which is not in fact paid.
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2.
Wealth tax
Certain property related assets (rates/council tax, and the proposed “mansion tax”) have an effective tax
charge on the value of assets, but there is no specific wealth tax in the United Kingdom.
3.
Where property suffers a charge both to IHT in the UK and to a similar duty in another country, relief may
be given in the UK by means either of a bilateral agreement or a unilateral allowance. Relief from double
taxation may also be given unilaterally in the UK. This consists of a reduction in the amount of tax payable, to
compensate for the additional foreign tax paid.
The United Kingdom has concluded bilateral DTAs for IHT and some gift taxes with the following countries:
• Republic of Ireland;
• Netherlands;
• South Africa;
• Sweden;
• United States of America;
• Switzerland;
• France;
• India;
• Italy;
• Pakistan.
DTAs regularly use the tax credit method so as to avoid double taxation. The DTAs with Denmark, Sweden
and France apply to both inheritance and gift taxes. The DTA with USA applies to inheritance and gift taxes
at state level. The DTA with Switzerland only deals with cases of inheritance.
4.
4.1Expatriate
For the purposes of IHT, it is possible for an expatriate to be regarded as domiciled in the UK, if at the time
he was either:
• domiciled in the UK within the last three years; or
• resident in the UK in not less than 17 of the 20 years of assessment ending with the present one.
It was announced at Summer Budget 2015 that from April 6, 2017, changes are proposed to deem two
categories of individuals to be UK-domiciled for all tax purposes. The two categories are individuals who
have been UK resident for more than 15 of the last 20 tax years (but are not UK-domiciled under general law)
and individuals who are UK-domiciled at birth, but despite acquiring a non-UK domicile of choice (and so
would not be UK-domiciled under general law), remain resident in the UK.
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4.2
The use of the “excluded property” category is the most common method of taking income and property
with a foreign aspect out of the IHT charge. In addition, certain overseas pensions payable in respect of
overseas service are left out of account in valuing a person’s estate immediately before death.
4.3
Consequences of IHT in the case of a relevant shareholding in a corporation
Shareholdings in corporations are subject to business property relief. The categories of relevant business
property, and the appropriate percentages, are as follows:
A shareholding in an unquoted company
100%
A business or an interest in an unincorporated business
100%
A controlling shareholding in a quoted company
50%
Land, buildings, machinery or plant used in a business carried on by a company
controlled by the transferor or by a partnership of which he/she is a partner
50%
To obtain the relief, the business property must usually have been owned by the transferor for the two years
preceding the transfer. Similar provisions for relief exist with agricultural property.
B.
Civil law
1.
Generally the gifting of assets in the UK does not need to be notarised. However, there are legal implications
of gifting property as well as specific rules covering deliberate deprivation of assets ahead of entering into
long term care. Therefore it is important to obtain legal advice before entering into such transactions.
2.
Under the law of England and Wales the estate of the deceased passes under the instruction left in the
individuals’ will. Where an individual dies without a valid will, the estate passes under the rules of intestacy.
However, where property is held jointly by two or more persons, under English law the co-ownership may
take one of two forms: joint tenancy or tenancy in common.
Where a joint tenancy exists, the property is owned by two or more persons as one composite legal entity.
They both (or all) collectively own 100% of the property. The principle feature of joint tenancy is the right of
survivorship.
The right of survivorship means that on the death of one joint tenant, the ownership of the entire property
is vested automatically in the surviving joint tenant(s). The interest does not pass under the deceased’s joint
tenant’s will or by the rules of intestacy.
2.1
If the deceased left a valid will, the estate will be distributed in accordance with the provisions of the will,
subject to any property owned under a joint tenancy (as outlined above.)
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If a valid will is not in place at time of death, the rules of intestacy apply. Both the will and the intestacy rules
may be challenged under English Law using the Inheritance (Provision for Family and Dependents) Act 1975.
Under the Inheritance (Provision for Family and Dependants) Act 1975 an application can be made to the
Court to set aside the terms of a will or vary an intestacy of a deceased person who died in England and
Wales on the grounds that reasonable financial provision has not been made for the applicant.
An application must be made within six months from the issue of the grant of probate or letters of
administration, or later with leave of the court. An applicant must fall within one of the following categories:
• the surviving spouse or civil partner, if married to or in a civil partnership with the deceased at the date of
death;
• a child of the deceased, or a person treated as a child of the deceased;
• a person who was being maintained by the deceased before the death;
• a person who was living with the deceased during the whole of the two year period immediately before
the death, as the spouse or civil partner of the deceased.
Individuals are often advised to make a will setting out how they wish their property to be disposed of on their
death. One of the reasons for making a will is to avoid the rules of intestacy which apply in the absence of a
valid will.
2.3
Types of testamentary dispositions: Last will
Under the laws governing England and Wales, the Wills Act 1837 lays down a number of formal requirements
that must be observed in drawing up a will. To be valid, the will must be in writing, it must be signed by the
testator and the testator’s signature must be witnessed by two persons who are present together when the
testator signs the will. The witnesses must also sign the will in the presence of the testator and each other.
The testator must be “sui juris”, meaning that they must be over 18 and of sound mind (In Northern Ireland
a minor who is or has been married can make a will). The testator must intend the will to be operative as a
testamentary disposition. A witness, or the spouse or civil partner of a witness cannot benefit under a will,
unless there are two other independent witnesses.
A will can be changed or revoked at a later date.
A testator may wish to alter his/her will, without writing it again. This can be done by executing one or more
codicils to the will which are read together with the will. A codicil must follow all of the same legal formalities
of a will.
Alternatively the testator may wish to revoke the existing will and replacing it altogether. This can be done at
any time before death and in a number of ways:
• by executing a later will which impliedly revokes the earlier will;
• by executing a later will which includes an express revocation of all former wills;
• by marriage or forming a civil partnership;
• by destruction.
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2.4Legacy
A gift to a beneficiary under a will is called a legacy. The person receiving the gift is referred to as the legatee.
The residue of the estate is everything left after the legacies have been distributed and all other debts and
expenses have been paid
Legacies can be classified as the following:
• a specific legacy is a gift of a specific part of the deceased’s estate which must be distinguishable from
the rest of the estate;
• a general legacy is a gift which does not refer to the specific property of the testator;
• a pecuniary legacy is a legacy of money;
• a demonstrative legacy is a legacy of money payable from a specific part of the testator’s estate;
• the residuary legacy is normally left to named beneficiaries, who take their shares after all other legacies
have been satisfied.
2.5Conditions
Burdens such as those created by way of testamentary dispositions in other jurisdictions are not applicable in
the United Kingdom.
2.6Usufruct
Usufruct is a common way of holding properties in Europe, although not a concept under English law. For
United Kingdom IHT purposes, HM Revenue and Customs will, in most cases, treat the usufruct as an
Interest in Possession trust. The specific IHT treatment will depend on the date the usufruct was created.
2.7
Testamentary dispositions are subject to certain form requirements. Most importantly they must be in writing,
signed by the testator himself together with two witnesses.
2.8
Where a person dies without leaving a valid will, the estate is distributed in accordance with the rules
of intestacy. Who inherits what then depends on which family members survive the deceased. The
circumstances may be as follows:
• surviving spouse or civil partner and issue;
• surviving spouse or civil partner, no issue;
• no surviving spouse or civil partner.
If the deceased leaves a surviving spouse or civil partner and issue, then:
• The spouse or civil partner is entitled to:
– the personal chattels;
– a statutory legacy of GBP 250,000 plus interest from the date of death;
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– 50% of the residue.
– The issue are entitled in equal shares to:
– the remaining 50% of the residue.
If the deceased leaves a surviving spouse or civil partner, but no issue, then:
• the spouse or civil partner is entitled to the entire estate.
If the deceased does not have a surviving spouse or civil partner, then the whole estate goes to the nearest
group of relatives absolutely, and if more than one, in equal shares in the following order:
• issue;
• parents;
• brothers or sisters of the whole blood;
• rothers or sisters of half blood (sharing one parent);
• grandparents;
• aunts or uncles of the whole blood;
• aunts or uncles of the half blood.
The rules of intestacy do not recognise unmarried partners or step relations. Therefore no provisions are
made for them.
If there are no surviving relatives who can inherit under the rules of intestacy, the estate passes to the Crown.
This is known as “bona vacantia”. The Treasury Solicitor is then responsible for dealing with the estate. The
Crown can make grants from the estate but does not have to agree to them.
2.9
A trust or settlement is an equitable obligation, binding a person (“trustee”) to deal with property (“the trust
property”) for the benefit of persons (“the beneficiaries”) of whom the trustee may be one.
The trust is an alternative form of gift to the outright or absolute gift. The donor or settlor creates a trust by
giving property to the trustees, who hold the legal estate in a fiduciary capacity on behalf of the persons
beneficially entitled, who may be named or ascertained by description.
There are several different types of trusts under English law; however, they broadly fit within three categories:
• Bare Trust;
• Life Interest Trusts;
• Discretionary Trust.
The Bare Trust is the simplest form of trust, which can be considered a nominee arrangement. The
trustee holds the property on behalf of the beneficiary and is required to act solely in accordance with the
beneficiary’s wishes. The trustee is the legal owner of the property.
In a Life Interest Trust, the beneficiaries (called “life tenants” under English law) are entitled to use the
trust property during their lifetime. Thereafter, the property passes to another beneficiary (called “the
remainderman” under English law).
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A Discretionary Trust is the most flexible form of trust. The trustees have the power to accumulate income
within the trust as well as distribute it to the beneficiaries as they see fit.
A trust can be created by deed or under a will; however there are certain circumstances on which a trust is
created without these documents. They include implied trusts and statutory trusts.
There are a number of advantages of making a will. The testator can, by will, choose the best persons to
be executors to effect execution of the testamentary dispositions of the testator. The primary duties of the
executors are to:
• determine the assets and liabilities of the estate;
• obtain the Grant of Probate;
• collect in the assets of the estate and pay the liabilities of the deceased;
• deal with HM Revenue and Customs and settle any tax liability;
• distribute the estate in accordance with the will.
Executors derive their authority from the will, and the deceased’s property vests with them from the moment
of death. The Grant of Probate gives a formal recognition to the vesting of the property to the executors and
is the final proof of the will’s validity.
3.
Law on succession
It is generally the domicile of the person that determines the legal system which applies when questions of
personal status or the right to succession to assets on death arise.
In the case of an individual domiciled in England, English law determines succession to the personal estate
under a will of the rules of intestacy, wherever that property is situated. Land is dealt with under the law of
the “lex situs” (the law of the place in which the property is situated.)
As a result of the law of lex situs, where an individual is domiciled in England, but owns land in another
jurisdiction, the individual should ensure he/she has taken advice on succession rules in the other country
and hold a valid will for that jurisdiction.
Finally, it should be noted that although United Kingdom IHT legislation and civil law principles apply across
the entire United Kingdom, certain minor administrative variations exist regarding its operation within
Scotland and Northern Ireland, which this handbook does not seek to elaborate on.
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United States
A.
Tax law
1.
Transfer tax system
Defining estate and gift tax
The United States federal estate and gift tax system is not a property or inheritance tax, but instead is a
system that imposes a tax on the transfer of property whether during life or at the time of death. The system
unifies the taxes paid on all transfers of property whether made during life (“gift tax”), at death (“estate tax”)
or on transfers made to those that skip a generation (“GST” tax, see paragraph 4 below). The primary source
for guidance on the taxes imposed on these transfers is title 26 of the U.S. Code – Internal Revenue Code
(“IRC”) Subtitle B – estate and gift taxes.
The unification of the estate and gift tax in the United States creates a single exclusion amount called the
“applicable exclusion amount”. For all transfers in 2016, each person is entitled to exclude transfers of up
to USD 5,450,000 (adjusted for inflation) from gift and estate taxes. This creates a need to keep track of all
transfers during a person’s lifetime as there are many rules in affect that complicate the calculation of both
the estate taxes and gift taxes. For married couples, this applicable exclusion can be combined and result
in a transfer of property totaling USD 10,900,000 that will not be subject to gift or estate taxes provided the
couple properly elects to split the transfers. If this amount is not used during life, the remaining exclusion
amount can be used to shelter transfers of property at death from estate taxes as long as portability election
is made.
Currently the top federal estate tax rate is 40%. The exclusion amount is adjusted per annum for inflation.
The following table presents the applicable exclusion amounts and the highest estate and gift tax rates from
2011 through 2016.
Calendar year
Estate and gift tax
exclusion amount (USD)
Highest estate and
gift tax amount (%)
2011
5,000,000
35
2012
5,120,000
35
2013
5,250,000
40
2014
5,340,000
40
2015
5,430,000
40
2016
5,450,000
40
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2.
Gift tax
2.1
Transfers of assets during a person’s life
2.1.1 Gift taxes
A gift is defined as a transaction where property is transferred gratuitously without full and adequate
consideration received regardless of the mode in which the transfer is made. Gift tax is imposed on any
transfer whether direct or indirect, in trust or outright, real or personal, or tangible or intangible. The person
gifting property is known as the “donor” or “transferor” and the person receiving the property is referred to
as the “donee” or “beneficiary.” The donor is responsible for paying the gift tax. The gift tax is cumulative
in nature. Therefore, all gifts made during a person’s lifetime are added together and used to calculate
the current tax due on gifts made in the calendar year. The calculation takes into account the applicable
exclusion amount of USD 5,450,000 as well as any other exceptions or exemptions to be discussed.
The two primary elements of a gift are 1) no consideration is received in return for the property transferred
and 2) the gift must be complete. If consideration is received, the tax is imposed on the value of the
property transferred in excess of the consideration received. In order for a gift to be considered complete,
the transferor must no longer retain any control over the property gifted. The donor must not be able to
regain control of the gift and there must be no power left with the donor to change its disposition. However,
a gift would be considered complete if the donor reserves the right to change only the time of enjoyment.
Common examples of gifts are cash, interests in property, forgiveness of debt, gifts of life insurance or
premium payments and transfers to trusts.
2.1.2 Applicability of gift tax
The gift tax is applicable to all U.S. citizens as well as U.S. residents. It also applies to non-resident aliens of
the U.S., but only for property located in the United States. Additionally, non-residents are not subject to gift
tax on intangible property. Individuals residing in a U.S. possession and who are U.S. citizens only by way of
their residency in the U.S. possession will be considered non-resident aliens for purposes of the U.S. gift tax.
Expatriates (former citizens or long term non-residents) that are subject to the tax systems of another country
are still subject to gift tax on transfers of tangible and intangible property in the U.S. provided that the gift is
made within 10 years after their period of citizenship or residency.
2.1.3 Valuation
The value of property subject to gift tax is the fair market value of the property on the date of transfer. Fair
market value is determined as the price at which such property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable
knowledge of relevant facts. When a donor transfers a partial interest in property, gift tax is applicable only
to the extent of the interest being transferred, unless it is not possible to value the amount retained by
the donor. If the transferor retains an equity interest in a corporation or partnership transferred to a family
member or an interest in a trust for the benefit of a family member, special valuation rules apply.
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2.1.4 Qualified disclaimers
If the donee decides he/she does not want the gifted property he/she can make a qualified disclaimer of the
property and the donee would not be treated as having made a taxable gift. In order for a donee to make
a qualified disclaimer, it must be in writing, received by the transferor within nine months of the date of the
transfer, the donee cannot accept any benefits of the property and the property being disclaimed must be
passed to someone without direction or input from the disclaiming party.
2.2
Annual exclusions
For transfers of property, the first USD 14,000 (the annual exclusion amount for 2016) of gifts of a present
interest made by a donor to separate individuals are not included in the gift tax calculation. In order to
constitute a present interest, there must be an unrestricted right to the property or income from the property
for immediate use. This right can be vested or contingent.
Gifts of future interests do not qualify for the annual exclusion. A future interest is one in which the donee’s
use, possession, or enjoyment of the property, or the income from it, does not commence immediately upon
its transfer. Future interests include reversions, remainders, discretionary income distributions, and other
similar interests.
2.2.1 Gift splitting by married couples
Spouses who consent to split gifts under clause 2513 IRC may combine the USD 14,000 annual exclusion
and transfer a total of USD 28,000 per donee in 2016 without being subject to gift tax.
2.2.2 Transfers in trusts
In general, transfers in trusts are gifts of future interests and not eligible for annual exclusions unless the
transferor grants the beneficiary the unrestricted right to the immediate use, possession or enjoyment of the
transferred property.
A common way to create present interests eligible for the annual exclusion without granting unrestricted
access to the trust’s corpus is to gift property in the form of “Crummey” trusts. A “Crummey” trust grants
beneficiaries of the trust the right to demand or withdraw a portion of the trust’s corpus (usually equal to the
annual exclusion) for a limited period of time. The beneficiary must be given notice of this right in order for
gifts to the trust to be eligible for the annual exclusion.
2.2.3 Transfers to minors
Transfers to minors, or for the benefit of minors, are considered completed gifts for the full fair market value
of the property transferred and are eligible for the annual exclusion provided they meet certain requirements
of clause 2503 (c) IRC. The property and income must be used for the benefit of a minor and any excess
must not be paid to the minor until he/she reaches age 21, or must go to his/her estate if the minor dies prior
to reaching age 21. If these requirements are met then the gift would be eligible for the annual exclusion. One
exception to this rule is if the property is transferred as a parent’s legal obligation to support his/her child, it
would be considered child support and not subject to gift tax.
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2.3
Exclusions for education and medical payments
Gifts that are paid directly to an educational institution for tuition for a beneficiary are eligible for unlimited gift
tax exclusion in addition to the annual exclusion and are not factored into the gift tax calculation. Payments
made to the education institution for books or other expenses are not eligible for the unlimited exclusion and
are subject to normal gift tax rules. Similarly, amounts for health or medical expenses paid directly to the
providers are also subject to unlimited gift tax exclusion.
2.4
Gifts to charity
Similarly, there is an unlimited charitable deduction available on transfers made to certain charitable
organisations. Organisations that are eligible for this deduction include charitable organisations, veteran’s
organisations, certain fraternal societies, and federal state and local governmental organisations provided
the use is for a charitable purpose. If the transferor elects to make a gift with both charitable and noncharitable beneficiaries, there may be a deduction allowed provided that the charitable interest is gifted using
a qualifying manner (i.e. charitable remainder annuity trust, charitable remainder unitrust, charitable lead
unitrust or a pooled income fund).
2.5
Gifts to spouse
Transfers made to one’s spouse are also eligible for unlimited gift tax exclusion known as the “marital
deduction”. All property transferred between spouses are eligible for this marital deduction unless the
property transferred is a terminal interest property (one that will lapse under a specific contingency i.e. life
estates and annuities). A marital deduction will be allowed for the donee spouse under a life estate with
power of appointment or if it is “qualified terminal interest property” (“QTIP”) under clause 2056 (b) (7) IRC.
If the donor and donee spouse are the only non-charitable beneficiaries in a qualified charitable remainder
trust, then the marital deduction would be allowed.
The unlimited marital deduction is not applicable if the donor’ s spouse is not a U.S. citizen at the time of the
gift unless the gift is to a “qualified domestic trust” (“QDOT”) under clause 2056 (d) IRC. For 2016, gifts to a
non-citizen spouse are eligible for a USD 148,000 annual exclusion (USD 147,000 in 2015 and USD 145,000
in 2014). For all gifts to be eligible for the marital deduction, they must be included in the total amount of gifts
for the year.
2.6
Computation of taxable gifts and gift tax liability
To compute the current year’s gift tax liability, first add together all of the donor’s total gifts for the calendar
year adjusted for all annual exclusions available, gift tax exclusions, and any deductions related to the
transfer. This results in the taxable gifts for the current year. This total is then added to all gifts from prior
years to arrive at the total taxable gifts. The total taxable gifts are then multiplied by the applicable percentage
to arrive at the tentative tax on total taxable gifts. The table below shows the unified rate schedule that is
used to compute both gift and estate taxes.
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Unified rate schedule
Column A
Column B
Column C
Column D
Taxable amount
over (USD)
Taxable amount not
over (USD)
Tax on amount in
column A (USD)
Rate of tax on excess over
amount in column A (%)
–
10,000
–
18
10,000
20,000
1,800
20
20,000
40,000
3,800
22
40,000
60,000
8,200
24
60,000
80,000
13,000
26
80,000
100,000
18,200
28
100,000
150,000
23,800
30
150,000
250,000
38,800
32
250,000
500,000
70,800
34
500,000
750,000
155,800
37
750,000
1,000,000
248,300
39
1,000,000
–
345,800
40
Similarly, the tax on taxable gifts for the preceding taxable years is calculated. This amount is then subtracted
from the tentative tax on total taxable gifts to arrive at the amount of gift tax applicable for transfers in the
current year. The donor then uses the applicable credit available in the current year, which is the tax on the
USD 5,450,000. In 2016 this amount is USD 2,125,800. The following table depicts the applicable exclusions
and their related applicable credits for the years 2011 through 2016.
Applicable exclusion and applicable credit
Calendar year
Applicable exclusion amount
Applicable credit
2016
5,450,000
2,125,800
2015
5,430,000
2,117,800
2014
5,340,000
2,081,800
2013
5,250,000
2,045,800
2012
5,120,000
1,993,800
2011
5,000,000
1,945,800
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The applicable credit is reduced by amounts used in prior years. The remainder is the applicable credit
available for the current year. If this amount is less than the gift tax applicable for transfers in the current
year, then gift tax would be payable by the donor on the amount in excess. If the amount is more than the
gift tax applicable for transfers in the current year, then the gift tax due in the current year is covered by the
applicable credit thus no tax would be payable by the donor in the current year.
3.
Estate tax
3.1
Transfers of property at death
3.1.1 Gross estate
Any property transferred at the time of death is included in the decedent’s gross estate and shall be subject
to estate tax. The U.S. estate tax is imposed on every taxable estate of a U.S. citizen or resident. The
amount of the decedent’s gross estate includes the value of all property, real or tangible wherever situated
transferred at the time of death. Items commonly included in the gross estate are real estate owned or in
contract to own, cash and marketable securities, mortgages and notes payable to the decedent, annuities,
and personal property to name a few. A decedent’s gross estate excludes any qualified disclaimers made
during life, and certain terminable interest property.
Generally, gifts made within three years of death are not included in the gross estate. The only exceptions to
this rule (other than gifts where the decedent retained an interest which would otherwise be includable in the
estate) are gifts of life insurance and gift taxes paid within three years of death.
3.1.2 Retained interests
Gifts made during a decedent’s life where the donor retained an interest or control in the property transferred,
may be added back in calculating the gross estate. Examples of these items are as followed:
a)gifts in which the decedent retained the power to amend, revoke, alter, terminate or change the
beneficiaries of the gift;
b)gifts where the decedent retained a life estate or the right to income, use, or enjoyment of the property for
life.
3.1.3 Powers of appointment
Property in which the decedent holds a general power of appointment is included in the decedent’s gross
estate. A power of appointment is the power to control the disposition of property by someone other than
the donor. The power of appointment is considered a general power if the powerholder can exercise it in
favor of him-/herself, his/her creditors, his/her estate or creditors of his/her estate. Since these powers allow
the person holding the power of appointment to receive benefit, it would be included in the powerholder’s
gross estate. If the power of appointment was limited, i.e. it specifically states that the powerholder cannot
exercise in favour of him-/herself, then the property would not be included in the gross estate.
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3.1.4 Joint property
There are several ways in which a decedent can own property jointly with another person. The specifics are
as followed:
a)joint property with the right of survivorship is included in the decedent’s gross estate except for a portion
that was furnished by the surviving joint tenant;
b)joint property held by a decedent that was acquired by gift or inheritance is included in the decedent’s
gross estate only by their fractional share of the property;
c)joint property held between spouses shall include only one half of the qualified joint in the decedent’s
gross estate.
3.1.5 Community property
In certain states, any property acquired by a married couple by means other than gift, devise, bequest, and
inheritance is considered community property. For spouses domiciled in community property states (Arizona,
California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Alaska which has
a form of voluntary community property), one half of all community property owned by a married couple is
included in the estate of the first spouse to die. This rule applies regardless of whether or not the surviving
spouse allows his/her share of community property to pass according to the will of the decedent.
3.2 Estate valuation
Generally speaking, property included in the decedent’s gross estate shall be valued at fair market value on
the date of death. The executor of the estate does have the option to elect to value the decedent’s gross
estate six months after the date of death. If this “alternate valuation” election is made it is irrevocable and any
property sold, exchanged, disposed of, or distributed is valued on the date of disposition.
3.3 Estate deductions and credits
3.3.1 Expenses
There is a deduction from the decedent’s gross estate available for funeral expenses, administrative expenses,
certain taxes, unpaid mortgages on property in the gross estate, claims against the estate and other debt of the
decedent. Estimates can be used if there is reasonable certainty that the amount will be paid.
Funeral expenses are allowable provided that they were actually paid. This also includes expenses related to
tombstones, monuments, burial lots or mausoleums.
Administrative expenses are deductible if they are actually and necessarily incurred in the estate’s
administration. These include commissions of the executor, fees paid to surrogates, appraisers, attorneys
and accountants. Expenses related to selling property from the estate are also deductible provided that the
sale is necessary to pay the decedent’s debts, other expenses or taxes.
Taxes that are deductible include unpaid gift taxes on gifts made before death and any income taxes related
to income properly includible on the decedent’s income tax return for the period before death.
Unpaid mortgages and other indebtedness related to property are fully deductible plus accrued interest
as long as the full value of the property is included in the gross estate. Other debts of the decedent and
claims against the decedent such as credit card debt or unpaid alimony are also fully deductible against the
decedent’s gross estate.
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3.3.2 Marital deduction
There is an unlimited deduction allowable for property that is transferred to the decedent’s surviving spouse.
In order to qualify the decedent had to have been married at the time of death, the surviving spouse must
be a U.S. citizen, and the property must be included in the decedent’s gross estate and be passed to the
surviving spouse and must not be a non-deductible terminal interest. There is no marital deduction available
for a decedent whose surviving spouse is not a U.S. citizen unless the spouse becomes a U.S. citizen prior
to the filing of a gift tax return or the property is passed through a QDOT.
As the result of a recent U.S. Supreme Court ruling, the estate of a decedent in a same sex marriage may
claim the marital deduction for transfers to the surviving spouse. This is allowable so long as they are legally
married in a jurisdiction that recognises their marriage, even if they move to or live in a jurisdiction that does
not.
The terminal interest rule (as previously described) applies for non-deductible terminal interest property and
may bar the marital deduction. Property transfers conditioned on the spouse’s survival for six months or less
or related to a common disaster are excluded from the terminal interest rule.
QTIP is also excluded from the terminal interest rule, thus allowable as part of the marital deduction. To
qualify as QTIP, all income from the property must be payable to the surviving spouse for life at least annually.
The income interest passing to the surviving spouse can be contingent on the executor’s exercise of a QTIP
election. Furthermore, no person should have the power to appoint any of the property to any person other
than the surviving spouse. Once the QTIP election is made, the surviving spouse is required to include the
property in his/her gross estate, but any estate tax attributable to the estate may be recovered from the QTIP.
3.3.3 State death tax deduction
For estates in which the decedent died after December 21, 2004 there is a deduction available for estate,
inheritance, legacy or succession taxes that the estate paid to any state. There is a timing limitation on this
deduction. In order to qualify, these taxes must be paid and claimed before the later of the following:
a) four years after filing the estate tax return; or
b) if a timely petition for redetermination is made with the tax court, then 60 days after a decision is final; or
c) the date an extension that has been granted expires for payment of estate tax or a deficiency; or
d)if a refund claim has been filed, then the latest expiration of 60 days from the mailing of the notice of
disallowance, 60 days after a court decision on the merits of the claim is final or two years following a
notice of waiver of disallowance is filed under clause 6532 (a) (3) IRC.
If the return has already been filed, a refund based on the deduction can be made if the claim is made within
the proper timing as defined above. Any refund received for this deduction will be issued without interest.
3.3.4 Charitable deduction
Similar to the gift tax charitable deduction, there is an unlimited estate tax charitable deduction. In order
for contributions to charitable organisations to meet the estate tax guidelines, they must meet the same
requirements as outlined in the deduction available for gift tax purposes. One additional requirement for an
estate to receive the deduction is that the charitable bequest must be for a public and not private purpose.
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3.3.5 Foreign death tax credit
A credit is available for foreign taxes paid on property located in a foreign country that is included in the
decedent’s U.S. gross estate. The credit is limited to the lesser of the foreign or U.S. tax related to the
property. If the property is located in a country in which there is a treaty with the U.S. then the estate can use
a credit provided under that treaty if it results in a lower U.S. estate tax.
3.3.6 Applicable credit
As previously discussed, the U.S. estate and gift tax provides each person with a unified applicable exclusion
amount of USD 5,450,000 in 2016 available on all transfers in life or at death. The tax on this amount is
referred to as the applicable credit. The applicable credit in 2016 is USD 2,125,800 as shown in the table
above. This amount cannot exceed the estate taxes payable for the year.
3.4 Computation of estate tax
The first step in calculating the estate tax is to calculate the gross estate. This takes into account the fair
market value of all property at the date of death or alternative valuation date if elected. All deductions are
subtracted to come up with the taxable estate. Any taxable gifts made after 1976 are added to the taxable
estate and this total is used to calculate the tentative tax by using the unified rate schedule presented earlier.
The tentative tax is then reduced by the amount of gift tax payable on the post 1976 gifts to yield the gross
taxable estate. This is then adjusted for any credits available including the foreign death tax credit to arrive at
the estate tax.
3.5 Portability of unused applicable exclusion amount
For estates of decedents dying after 2010, the executor can elect to transfer the “deceased spousal unused
exclusion amount” (“DSUE”) to the surviving spouse. Generally, the DSUE is the lesser of (1) the basic
exclusion amount (USD 5,450,000 for 2016) or (2) the excess of (a) the applicable exclusion amount of the
last deceased spouse, over (b) that spouse’s taxable estate plus adjusted taxable gifts. In other words, if the
estate of the first spouse to die makes the appropriate portability election, the surviving spouse’s applicable
exclusion amount is increased to the aggregate of (1) his/her basic applicable exclusion amount plus (2) the
aggregate DSUE amount from the last deceased spouse.
This portability election needs to be made on a timely filed (including extensions) estate tax return (form 706)
even if form 706 is not otherwise required to be filed. It is important to note that this portability option is only
available for estates of decedents dying after 2010.
4.
Generation-skipping transfer tax
Generation-skipping transfer (“GST”) tax is a tax meant to ensure that any property transferred is subject
to a transfer tax at least once at each generation. This occurs when property is transferred from an older
generation such as a grandparent to his/her grandchild thus effectively skipping a generation. The GST tax
rate is a flat rate of 40%. A skip person is defined as a person two generations or younger from the transferor
or a trust for the benefit of one or more skip persons.
176
A GST can take place in one of three ways:
a) a distribution to a direct skip. In this scenario, the distribution is also subject to estate and gift tax;
b)a taxable termination. This occurs when interest in property that is held in trust is terminated and the
property is held for or distributed to a skip person;
c)taxable distribution to a skip person. This occurs when a trust distributes property that is not a direct skip
or a taxable termination to a skip person.
GST tax does not apply if the parent of the skip person dies before the transferor. GST tax also does not
apply on any transfers that are not subject to gift tax due to the unlimited exclusion for medical and tuition
payments or on transfers that qualify for the annual gift tax exclusion.
Similar to the estate and gift tax lifetime exemption, individuals are entitled to a lifetime exemption from the
GST tax equal to USD 5,450,000 in 2016. This exemption is adjusted for inflation and equals the estate tax
exemption. Unlike the federal exemption amount, the GST exemption is not “portable” (see paragraph 3.5)
and may not be used by the deceased spouse.
5.
Wealth tax
Under the United States transfer tax system, there is no separate wealth tax.
6. Double taxation agreements (“DTAs”)
The United States of America has entered into a number of estate tax treaty conventions which include
bilateral double taxation agreements (“DTAs”) for estate tax and in part also for gift tax to provide a credit to
avoid double taxation. At present, extensive DTAs in the field of estate tax are in force with only the following
countries:
•Australia°
•Ireland
•Austria*
•Italy°
•Belgium
•Japan°
•Canada°
•Netherlands*
•Denmark*
•Norway°
• Finland° (no gift tax treaty)
• South Africa
• France*° (PR-CP only applies to estate tax)
•Switzerland
• Germany*° (PR-CP only applies to estate tax)
• United Kingdom*
•Greece°
*New situs provisions for DTAs.
°Pro-rata unified credit provision (“PR-CP”).
In addition, these estate tax treaties include rules to determine the proper situs of property held within an
estate. For example, real and tangible property located in the U.S. is considered to be situated in the U.S.
unless otherwise stated in the applicable treaty.
177
7.
7.1
Income taxation of estates
There are two types of taxes imposed on an estate: one on the transfer of assets from the decedent to the
beneficiaries (“estate tax”) and one on the income earned by the estate’s assets (“estate income tax”). The
filing threshold is low where the estate only has to generate USD 600 of income to trigger a filing requirement.
The estate income tax has a graduated rate structure where the top marginal rate of 39.6% begins at just
USD 12,301 of taxable income. The estate is also subject to the net investment income tax (“NIIT”) of 3.8%
on certain investment income and possibly state income tax as well.
The estate may elect to file on a fiscal year ending on the last day of the month not exceeding 12 months
from the date of death of the decedent or it may file as a calendar year taxpayer. The estate income tax
return is due three and a half months after the close of its taxable year. If distributions of income are made
from the estate, these are typically taxable to the beneficiaries and reportable on a Schedule K-1. However,
long term capital gains are generally taxable only to the estate.
7.2 Foreign earned income exclusion
U.S. persons working and living abroad can exclude foreign earned income of USD 100,800 for the tax year
2015. Additionally, certain foreign housing expenses may be excluded or deducted from income. The ability
to exclude or deduct these amounts is based upon either the “bona fide residence test” or the “physical
presence test”.
The bona fide residence test applies to both U.S. citizens and U.S. resident aliens who are a citizen or
national of a country with which the U.S. has an existing income tax treaty. The bona fide residence test is
met by establishing residency in a foreign country for an uninterrupted period that includes an entire tax year.
Taxpayers can be a partial year bona fide resident in either the year of arrival or departure, but not until a
bona fide residency has been established for a full tax year.
The physical presence test applies to all U.S. citizens and resident aliens. This test is met by being present
in a foreign country for a period of 330 days over a period of 12 consecutive months ending in the current
tax year. Unlike the bona fide residence test, the physical presence test is not based on the facts and
circumstances of the residency established in the foreign country. A pro-rated exclusion is available if less
than 12 months fall within the current tax year under the physical presence test.
7.3 Expatriation tax or “exit tax”
U.S. citizens forfeiting their U.S. citizenship and long-term U.S. residents who cease their permanent
residency in the United States after June 16, 2008 may be considered a “covered expatriate” and subject to
the exit tax under clause 877A of the IRC. A “covered expatriate” includes an individual who:
• has greater than USD 2,000,000 net worth on the day prior to expatriation;
• exceeds the average annual net income tax threshold during the five year period preceding expatriation
(USD 160,000 in 2015); or
• failed to comply with all U.S. tax obligations during the five year period preceding expatriation.
178
The covered expatriate would be subject to the “mark to market regime”, where property that would be
taxable as part of the expatriate’s gross estate for federal estate tax purposes is treated as sold on the day
prior to the expatriation date at its fair market value. Property with exception to this tax includes: deferred
compensation items, tax deferred accounts, and interest in non-grantor trusts in which the expatriate is a
beneficiary on the day prior to expatriation.
7.4
The taxation of foreign pension and retirement funds to U.S. persons is complex. Foreign pensions for U.S.
purposes will generally fall into three main classifications; (1) qualified plan; (2) foreign grantor trust; (3) nonexempt employees’ trust. A foreign pension will rarely qualify as a qualified plan as it must fit the definition
under U.S. law including that it be a trust created or organised in the United States. In some instances it
might be considered a foreign grantor trust if it is employee funded and owned by a U.S. person. However,
most employment related pensions including stock bonus and profit sharing type plans fall into the category
of an employees’ trust. An employees’ trust generally is not subject to current taxation provided that the
employee contributions are incidental (i.e. not more than 50% of the total contributions come from the
employee and that the plan is not discriminatory) but employer contributions are currently taxable. If the
plan is discriminatory and the employee is highly compensated, then the accrued benefit to the beneficiary
is taxable each year. The distributions in retirement are then taxed under the annuity rules where a pro-rata
portion of the distribution is considered principal and income. However, there may be treaty relief to exempt
from current U.S. taxation the earnings of the plan assets and/or contributions to the plan.
The applicable treaty should also be consulted when retirement benefits are withdrawn. The treaties typically
provide that the country where the individual resides will determine where the pension or retirement benefit
will be taxed. However, in most U.S. treaties the U.S. reserves the right to tax its citizens on worldwide
income as if the treaty were not in force. Double taxation is avoided by allowing a foreign tax credit on the
U.S. return for the foreign taxes paid.
7.5 U.S. income taxation of non-resident aliens
Non-resident aliens of the United States (individuals who are neither a U.S. citizen or U.S. national), must
file a U.S. income tax return to report effectively connected income (“ECI”) and in some cases also to report
fixed, determinable, annual or periodical (“FDAP”) income. ECI is essentially U.S. trade or business income.
FDAP income includes compensation for personal services, dividends, interest, pensions, annuities, rents,
royalties, and other various sources of income. This income is subject to an income tax withholding rate of
30%. Both ECI and FDAP income from U.S. sources is reported on form 1040-NR. If a non-resident only has
FDAP income, then no form 1040-NR is required.
Non-resident aliens that are also present in the U.S. for 183 days or more are taxed at the 30% rate (or a
lower treaty rate if applicable) on their net capital gains. Non-resident aliens that are present in the U.S. for
less than 183 days are only taxed on the following capital gains:
• gains from an effectively connected trade or business;
• gains on timber, coal, or domestic iron ore;
• gains on the sale of contingent payments received for patents, copyrights, or similar property as well as
the transfers or undivided interests in patents;
• gains on original issue discount obligations.
179
Additionally, the U.S. state in which the property subject to the gain is located or generally where the income
is earned may tax the non-resident alien.
A non-resident alien that has an interest in a partnership and that partnership has ECI, then the partnership
must withhold tax on the non-resident alien’s allocable share of ECI. The withholding tax rate for noncorporate foreign partners is 39.6% and 30% for corporate foreign partners.
A non-resident alien who disposes of a U.S. real property interest is also subject to “Foreign Investment in
Real Property Tax Act” (“FIRPTA”) income tax withholding at a rate of 10% of the sale price. A disposition
includes but is not limited to the sale or exchange, transfer, gift, liquidation, or redemption. Additionally, the
U.S. transferor to a foreign person is also required to withhold 10% of the sales price under FIRPTA.
Non-resident shareholders of U.S. corporations are subject to a 10% withholding tax on the fair market value
of the property distributed if the non-resident shareholder’s interest in the corporation is a U.S. real property
interest and the distribution is in redemption or liquidation of the stock.
7.6 United States reporting for certain foreign assets
The Unites States has several reporting obligations to include with their U.S. tax return regarding foreign
assets owned directly or indirectly by U.S. persons and transfers of assets to or from a foreign person.
A U.S. person includes:
• citizens or residents of the Unites States;
• domestic partnerships and corporations;
• estates other than foreign estates;
• trusts in which a court in the United States is able to exercise primary supervision over the administration of the
trust and one or more U.S. persons have the authority to control all substantial decisions of the trust U.S.;
• any other person that is not a foreign person.
A foreign person includes:
• non-resident alien individuals;
• foreign corporations and partnerships;
• foreign estates;
• foreign trusts;
• any other person that is not a U.S. person.
Items that could cause one of the additional reporting requirements include but are not limited to the following:
• ownership of a foreign partnership or stock in a foreign corporation;
• a U.S. person that is an officer or director of a foreign corporation;
• a U.S. person that transfers property to a foreign partnership or corporation;
• a U.S. person that creates and/or transfers assets to a foreign trust;
• a U.S. person that is a beneficiary of a foreign trust or estate;
• a U.S. person that received gifts from a non-resident alien individual or foreign estate, trust, corporation or
partnership.
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Additionally, U.S persons may be required to file form Fin Cen 114, Report of Foreign Bank Accounts to
report their financial interest in or signature authority over certain foreign bank accounts. This form is filed
separate from the U.S. tax return with the Department of Treasury each year and is due to be received no
later than June 30 of the following year.
B.
Common law
The United States is a “common law” country, as opposed to civil law. Most law regarding estates, trusts,
and gifts is governed at the state level, as opposed to at the federal level.
1. Asset transfer at lifetime/donation
A gift is defined for federal wealth transfer tax purposes as a transfer for less than adequate and full
consideration. States also have definitions of gifts, which may vary from the definition for federal wealth
transfer tax purposes.
2. Basics of transfer mortis causa/right of succession
American law generally holds that individuals have the ability to dispose of their estates as they wish. If an
individual dies without making a will, the individual’s property will pass by “intestacy”, the exact mechanisms
of which vary from state to state.
2.1 Legal order of succession
As noted previously, who constitutes an individual’s heirs for purposes of intestacy varies from state to state.
Generally, a spouse and children, if any, are deemed to be heirs for purposes of intestate distribution.
American law generally provides that an individual may dispose of his/her “probate property” by will. “Probate
property” means property that does not pass pursuant to the terms of a contract or does not pass by
operation of law.
2.3 Types of testamentary dispositions
In addition to a will, an individual may use a trust as a “will substitute”. The most common form is a will that
directs all of an individual’s probate property to pass to a trust, and the trust disposes of the individual’s
estate. As wills are typically public records in American jurisdictions, this mechanism allows for privacy, as
trusts generally are not public.
2.3.1 Last will
The rules of wills are governed by state law and thus vary. Generally, the testator must understand that the
document is his/her will, he/she must understand how the will disposes of his/her property, and he/she must
be signing the will of his/her own volition. The exact requirements are nuanced and vary by state.
181
While some states permit a contract to make a will, these are generally not used.
2.4 Legacy
In American law, the term legacy generally refers to a bequest of money under a will. It does not usually
confer any particular sort of status.
2.5 Conditions
Conditions may be imposed on bequests; however, courts will generally strike down conditions that are
deemed to be contrary to public policy.
2.6 Usufruct
Some American states have the concept of a “usufruct”, but it is rarely used and is used primarily in the
context of real estate.
2.7 Form of testamentary dispositions
Although the exact requirements vary by state, generally a testator must sign his/her will in the presence of at
least two witnesses.
2.8 Right to a statutory share
Most states permit a spouse and minor children to claim a certain percentage of the decedent’s estate, but
those individuals must usually elect to take either their “elective share” or what is provided for them in the will.
The specifics of these “elective share” laws vary widely.
2.9 Family foundation/trusts
An individual may create a private foundation. These are subject to many federal tax laws. A family foundation
may be formed as a non-profit corporation or as a trust, both of which are governed by state law.
A testator typically appoints an executor to administer the estate. This role consists of marshaling estate
assets, paying any debts, expenses, and taxes, and overseeing the distribution of the estate according to the
terms of the will.
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