Proceedings relating to inheritance and gift tax before the Tax Court involve specific procedural aspects that may determine the outcome.
Anyone challenging an inheritance or gift tax assessment tends to focus first on the substantive issues, such as the valuation of the transferred assets or the existence of grounds for exemption. However, the outcome of proceedings before the tax courts is often determined by procedural decisions taken months or even years earlier. As the amounts in dispute are typically higher here than in income tax proceedings, such an error carries particularly serious consequences.
Preliminary questions of civil law are not binding on the Tax Court
Inheritance and gift tax law is significantly more influenced by civil law than income tax law. Who has become an heir, who is the donor and who is the recipient, and what the subject of the gift was, are determined in accordance with civil law. However, this link to substantive law implies that no procedural obligation. The Tax Court rules on preliminary civil law issues by virtue of its own jurisdiction to determine such issues and is, in principle, not bound by a final civil judgement. A dispute over an inheritance that has been won at several levels of jurisdiction therefore does not preclude the same issue from being assessed differently in tax proceedings.
The Tax Court may conduct its proceedings in accordance with Section 74 of the Fiscal Court Act (FGO) suspend it or, with the consent of all parties involved, place it on hold, although this leaves the assessment procedure open for long periods. An amicable solution is often preferable, whereby the tax is provisionally assessed in view of the pending civil proceedings in accordance with Section 165(1), first sentence, of the German Fiscal Code (AO) is set and the main proceedings are declared to be settled. The notice remains subject to amendment to the extent specified in the provisional note. This does not give rise to any interest risk, as inheritance and gift tax, in accordance with Section 233a(1), first sentence, of the German Fiscal Code (AO) is not subject to full interest accrual.
Preliminary decisions determine which decision is to be challenged
The value of property, as well as the value of business assets and shares in companies, is determined separately (Section 151(1), first sentence, points 1 to 3 of the Valuation Act (BewG)). Objections to these findings may be raised in accordance with Section 351(2) of the German Fiscal Code (AO) may only be brought against the decision on the merits itself, and this restriction on challenges takes precedence over Section 42 of the Financial Court Act (FGO) in the legal proceedings. Any appeal against the tax assessment notice challenging the assessed value will, in this respect, be unsuccessful.
The opposite misconception is just as costly, because not everything that sounds value-based is decided at the factual level. The tax exemption for properties let for residential purposes under Section 13d(1) of the Inheritance Tax Act This means that eligible properties are to be valued at only 90 % of their value. However, a decision on the application of this rule is made at the tax assessment stage rather than at the valuation stage, as it is a substantive exemption provision rather than a valuation rule. Anyone who allows the assessment notice to become final and instead attempts to enforce the reduction at the valuation stage will lose the tax relief permanently.
Prior acquisitions under section 14 of the Inheritance Tax Act: the old gift tax assessment remains in force
Acquisitions made by the same person within a period of ten years are treated in accordance with Section 14(1), first sentence, of the Inheritance Tax Act added together. The individual assessments do not constitute a primary and secondary notice in this context. If the tax office sets the gift tax at zero euros due to personal allowances, the prevailing view is that there is no standing to bring an action against this notice, even if the assets were overvalued. This does not generally result in any disadvantage, as, in the absence of binding effect, the prior acquisition must be valued independently when the assets are subsequently aggregated, meaning that objections to the valuation are still possible at that stage.
The situation is different if tax has in fact been assessed on the previous acquisition and the assessment is too high. If it becomes final, the error continues to have effect permanently. According to Section 14(1), second sentence, of the Inheritance Tax Act (ErbStG) only the tax that would have been levied on the earlier acquisition is credited against the tax on the total acquisition. Also Section 14(1), third sentence, of the Inheritance Tax Act (ErbStG) is of no help, as the Federal Fiscal Court bases its decision there too on the tax that would be assessed if the law were correctly applied (Federal Fiscal Court judgement of 22 July 2020 – II R 42/17). A gift tax assessment should therefore never become final without having been reviewed, even if the tax assessed appears to be small.
It is up to the taxpayer to offer evidence
Inheritance and gift tax proceedings frequently require determinations to be made regarding events that occurred a long time ago, such as the interpretation of a will drawn up decades ago. In addition to documentary evidence, witness evidence is therefore of particular importance. Despite the principle of ex officio investigation under the Section 76(1) of the Fiscal Court Act (FGO) the court is, in practice, reliant on the claimant’s submissions, as suitable witnesses are not usually to be found in the case file. Furthermore, the tax authorities often refrain from seeking information from third parties during the administrative proceedings, in accordance with Section 92, second sentence, point 1 of the German Fiscal Code (AO).
This sets the course at an early stage. Keep permanent records of gifts and the drawing up of wills, make a note of who can act as a witness to individual transactions, and, for every decision, check at which level an objection should be lodged. Anyone who only realises during legal proceedings that the relevant decision has long since become final will no longer be able to enforce a substantively correct position. Our specialist solicitors in tax law and inheritance law, as well as our tax advisers, will be happy to assist you in reviewing inheritance and gift tax notices, as well as in objection and legal proceedings.