The father of my (UK resident and domiciled) client died recently intestate in Germany. The father was tax resident and domiciled in Germany. My client is entitled to a share of the estate under German succession law. All the assets of the deceased (including my client’s share) are held in an “Erbengemeinschaft”.
Has anyone any experience of how an “Erbengemeinschaft” should be treated for UK tax, that is to say should it be treated as a transparent entity - or by analogy with an Estate in the UK, should it be treated as a separate entity, at least until completion of the period of administration (however that may be decided under German Law)?
I am told, the heirs administer the “Erbengemeinschaft” jointly and none of the other heirs are UK resident. Thus, if the “Erbengemeinschaft” is treated as an estate, presumably it (or the heirs acting jointly) would be treated as non-UK resident (by virtue of sec 834 ITA 2007).
Any advice gratefully received.
Harry
An Erbengemeinschaft is not a separate entity. It is closer to title in property by joint tenancy. It is also not an estate to be administered as in the UK. An Erbengemeinschaft exists until the members unanimously agree to dissolve it and distribute all property and/or proceeds to the members. Very often an Erbengemeinschaft holding real property can exist for quite some years. It seems to me that there are no grounds for treating an Erbengemeinschaft as UK resident, especially in the scenario you have outlined. And it is governed by German law, to include German tax law.
It is not listed at INTM180030. It seems unlikely that HMRC are unaware of its existence so the implication is that it is not a separate legal entity and so is transparent. There can be issues if German law including tax treats it as opaque and the UK does not.
If transparent would seem to be a “person” and thus a “body of persons” for Article 3 1) d) of the UK/ Germany DTR and it is likely that most of its members are German resident under Article 4). But that is a question of fact. If it is an “estate” at all its PRs are likely to be non-resident under s834 and income from it will be taxable as from a “foreign estate” under s 651 ITTOIA.
Under our PIL the law of succession is likely to be German and distribution of the estate will follow German law. Tax payable in Germany is likely to be relieved under the DTR or by unilateral relief. It is possible that the German law of intestacy does not impose something that corresponds to an estate at all as an interim regime before assets arrive in the Erbengemeinschaft regime and John Sturgeon would appear to confirm that. Your client will then be taxable in the UK on any income or capital gains arising from its assets subject to the Treaty but with credit in any event for German tax. He will no doubt need advice on whether or not his share as a member is disposable by him alone, either in law or in practical reality. Claims can be made for foreign income and gains which cannot be remitted to the UK because of local law to be excluded from charge until it becomes possible.
Jack Harper
John, many thanks for the helpful information and comments.
Harry
Jack,
Thank you for the helpful detailed input, very much appreciated.
Harry
Just one point from a German tax point of view: We treat the Erbengemeinschaft like a partnership for income tax purposes. Only if it is dissolved within 6 months we can disregard it for simplification purposes. If the Erbengemeinschaft is treated like a partnership there is a separate determination of the income of the Erbengemeinschaft for German income tax purposes, and any treaty benefits your client might be able to claim for purposes of his German income taxation should be considered already in this process. Your client should check whether the person being in charge of this in Germany is aware of this, and knows how to handle this.
Jörg Klette
Thanks for making this point Jörg. Are you saying that in the 6 month period from death, there is an option - the heirs can either chose that the EG is taxed as an opaque entitiy in Germany or that it is treated as a partnership?
Harry
No, the alternative to a treatment as a partnership is a deemed retroactive dissolution of the Erbengemeinschaft to the time of death. As a consequence the assets and liabilities and the respective income are deemed to have passed over to the respective heirs directly at the time of death in accordance with the actual distribution in the dissolution of the Erbengemeinschaft. Hope that helps.
Jörg
Jörgchristian Klette | Director | Steuerberater, Rechtsanwalt | Private Tax
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft
Office: +49 6196 996 24486 | Mobile: +49 160 939 24486 | joergchristian.klette@de.ey.com
Jörg one thing is puzzling me. The EG had holdings of shares in certain British (stock market listed) companies. The German accountant is insisting that the client has to pay German tax on his share of the dividends from these UK shares (and cannot recover German tax withheld by the paying bank). If the EG is genuinely tax transparent, how can Germany tax the client on UK dividend income?
Harry, the dividends falling to your client should not be subject to German tax. But if the shares are held through a German bank, it will at least be difficult to make the bank refrain from withholding tax on the dividends, as the German EG is in between the bank and your client, and withholding tax is mostly about procedural law. Also, it is difficult to get the withholding tax back if one is not a German tax resident. The rules are changing constantly, and I do not know by heart which rules would currently apply in the case of your client. If the amounts are not really high, it is probably not worth the effort to try to reclaim them.
The smartest solution is probably to get the shares out of the EG asap by distributing them to the heirs. This might be done by a partial dissolution of the EG, which only comprises the shares.
Best regards
Jörg
Jörgchristian Klette | Director | Steuerberater, Rechtsanwalt | Private Tax
Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft
Office: +49 6196 996 24486 | Mobile: +49 160 939 24486 | joergchristian.klette@de.ey.com