Say your daughter or son is abroad for study or work purposes, but you wish to transfer interest or shares in your company to your offspring as part of his or her inheritance. You know that Germany’s preferential inheritance tax/gift tax provisions for business assets apply. But what about the provisions in your child’s country of residence? Can it impose a gift tax? Does its tax law even impose a gift tax? Do transfers from donors who are not subject to unlimited tax liability fall under the foreign gift tax? If no foreign gift tax applies, the country may still require that you satisfy certain notification or reporting obligations.
These are not the only questions that can arise. How is the value of the interest or shares determined abroad for the purposes of the gift tax? Can the value of a right of usufruct –your right to receive dividends and profits on interest or shares even though your child is the shareholder or partner – be deducted from the gift tax basis? How is its value determined? How will later distributions from a German corporation or your profit shares from a German partnership be treated abroad when calculating your income tax liability? To what extent can any applicable German income taxes – before or after German trade tax deductions – be credited against income taxes? And to what extent must the right of usufruct be taken into account?
Understandably, people tend to focus on gift taxes when transferring interest or shares to relatives. But it is important that you also consider the income tax consequences, since gift transfers can lead to the recognition of built-in capital gains. It all depends on what is being transferred. In the case of a partnership interest in a German GmbH & Co. KG – careful analysis is needed in advance. In many cases, restructuring will be necessary. Under certain circumstances, the recommendation will be to refrain from performing the transfer or to wait until the daughter or son has moved back to Germany. If corporation shares are being transferred, the options are limited and require careful consideration.
If you are planning transfers to relatives, I will work together with my partners to determine the tax implications in Germany and in the other country or countries in question. I will assist you with any restructuring and will ensure that all the notification and reporting obligations are met.