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02.09.2016 | KPMG Law Insights

Criminal Tax Law – Obligation to Report Assets of Deceased German Bank Customers Also Applies to EU Foreign Branches

Obligation to Report Assets of Deceased German Bank Customers Also Applies to Foreign EU Branches

The German Inheritance Tax Act requires banks, savings banks and insurance companies to report the assets of a deceased customer to the relevant German tax office. This also applies to branch offices. In 2008, the German tax office sued a German savings bank with a branch in Austria for providing information, but Austrian law does not recognize this obligation.

Background

The German Inheritance Tax Act (ErbStG) requires banks, savings banks and insurance companies to report the assets of a deceased customer to the relevant German tax office.

This was referred to by a German tax office in 2008. It requested a German savings bank with a branch in Austria to provide relevant information on German customers of the Austrian branch with retroactive effect from January 1, 2001.

The German savings bank took legal action against this before the German Tax Court. The argument: In Austria, the statutory banking secrecy applies and Austrian law does not recognize a corresponding duty to notify the tax authorities. Therefore, one would be liable to prosecution in Austria for a breach of banking secrecy if one complied with the duty of disclosure under German law.

The savings bank lost the case and appealed to the German Federal Fiscal Court (Bundesfinanzhof, BFH), which referred the case to the European Court of Justice on November 19, 2014 (ECJ Case C-522/14). On November 26, 2015, the Advocate General delivered his opinion to the ECJ. He recommends to grant the request for information of the German tax office and to reject the claim of the German savings bank.

10 questions and answers

1. what are the arguments of the Advocate General?

The Advocate General argues that the notification requirement under Section 33 of the Inheritance Tax Act does in itself constitute a violation of the freedom of establishment guaranteed by the EU Treaty. However, according to the case law of the ECJ, the division of taxing powers between member states is one of the reasons that could justify a restriction of the freedoms of the internal market, including the freedom of establishment.

Foreign branches are legally dependent, quasi a department of the credit institution abroad. These branches are therefore subject to the legal regime of the home state and not to the legal regime at the place of the branch.

This justifies imposing certain obligations on domestic credit institutions on their foreign branches as well. This applies in particular if the obligation only concerns the relationship between the foreign branch office and customers in the home country.

2) How likely is it that the ECJ will follow the Advocate General’s request?

It must be expected that the ECJ will consider the German tax office’s request for information to be lawful. After that, the BFH will probably finally reject the appeal of the savings bank.

3. what is the objective of financial management?

The tax authorities want to oblige the German savings bank to report inheritance cases of German customers of the foreign branch to the German tax authorities. The tax authorities want to check whether the assets left at the foreign branch have been declared for tax purposes by the heirs.

4. to which inheritance cases does this apply?

According to the request for information, inheritance cases from January 2001 onwards are affected.

5. are these cases not already time-barred?

The question of the statute of limitations must be examined on a case-by-case basis, as several criteria may be relevant here.

In principle, a 10-year statute of limitations applies under tax law in the case of intentional tax evasion. The start date depends on whether or when an inheritance tax return was filed. If, for example. does not file an inheritance tax return for an inheritance in 2002, intentional evasion of inheritance tax does not become time-barred until December 31, 2015. An inheritance in 2003 accordingly only on December 31, 2016, etc.

Under criminal law, intentional tax evasion is subject to a statute of limitations of 5 or 10 years, depending on the amount of tax evaded. The statute of limitations begins here with the notification of the inheritance tax assessment.

6. Do the inheritance tax allowances also apply to the assets of foreign branches?

Of course, the inheritance tax allowances also apply to assets bequeathed abroad. Whether the allowances are sufficient or have been used up in whole or in part by taxable gifts must be examined in each individual case.

7. what can heirs of deceased bank clients do if you have not declared the inherited assets for tax purposes?

Anyone who has inherited assets that were managed (not only) at a branch in another EU country of a German bank, savings bank or insurance company and has not declared this in the inheritance tax return can subsequently declare this by way of a self-disclosure with exemption from punishment.

8. are independent subsidiaries in other EU countries also affected?

According to the legal comments of the Advocate General, legally independent subsidiaries abroad are not affected. It must be a dependent branch of a German credit institution.

9. why does this also apply to customers of insurance companies?

The German Inheritance and Gift Tax Act subjects to inheritance tax any “pecuniary advantage acquired directly by a third party on the basis of a contract concluded by the testator upon his death” (Section 3 (1) No. 4 ErbStG). This includes claims under life insurance policies taken out by the deceased during his lifetime for the benefit of the beneficiary or beneficiaries.

10. Are there other tax obligations for the heirs to consider besides inheritance tax?

Yes. From the death of the decedent, income from capital assets earned on the inherited property must be declared for tax purposes by the heir or heirs. In the case of a community of heirs, all members earn income proportionately according to their inheritance quota. In addition, the heirs must report and correct the decedent’s tax errors and also pay the decedent’s abbreviated taxes in arrears.

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Contact

Dr. Heiko Hoffmann

Partner
Munich Site Manager
Head of Criminal Tax Law

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81671 München

tel: +49 89 59976061652
HHoffmann@kpmg-law.com

Dr. Jochen Maier

Senior Manager

Heinrich-von-Stephan-Straße 23
79100 Freiburg im Breisgau

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Arndt Rodatz

Partner
Head of Criminal Tax Law

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20355 Hamburg

tel: +49 40 360994 5081
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