Unresolved cross-border issues and possible solutions
In the EU some people can effectively pay inheritance tax twice or more in different countries. Why?
EU Member States are not obliged to harmonise or even coordinate their policies on direct taxes (such as income taxes, property or inheritance taxes). They only have to respect the EU Treaties, which means for instance that Member States are not allowed to discriminate against EU citizens when imposing inheritance taxes. However two or more Member States can impose their taxes in parallel.
A tricky problem
Most EU Member States levy taxes upon the death of a person. Some Member States apply a tax on the heirs, while other Member States apply a tax on the basis of the estate. In both cases tax liability is determined on the basis of a variety of relevant factors (i.e. the residence, domicile or nationality of the deceased and/or of the beneficiary; and/or the location of property). Tax authorities can also, in some cases, apply these factors concurrently. The factors may also have different meanings in the various countries. This situation may potentially lead to double or even multiple taxation of the same inheritance in different Member States.
Double taxation can also arise because Member States apply different valuation methods for the same property.
Another problem is the fact that some Member States apply high inheritance tax rates for certain group of beneficiaries: the rate may even reach 80% over a certain threshold amount in cases where the deceased and the beneficiary are not related.
Many Member States have adopted mechanisms for avoiding double taxation of inheritances in their domestic laws. However, such mechanisms would not, in most cases, provide complete relief from double taxation. Apart from these limited domestic relief provisions there are few solutions to double taxation as Member States have concluded very few bilateral tax treaties for the avoidance of double taxation on estate and inheritance tax.
Possible EU solutions
The Commission has been working for some time on eliminating double taxation on cross-border inheritances. In 2010 the Commission consulted the public on possible approaches to tackling cross-border inheritance tax obstacles for citizens and SMEs within the EU.
After assessing the impact of various possible options to address the existing problems, the Commission in 2011 presented a Recommendation regarding relief for double taxation of inheritances. This Recommendation consisted of suggestions for Member States regarding how they could modify their existing domestic rules for relieving double inheritance taxation. These modifications could include introducing credit for tax paid in another Member State or an exemption of certain items of foreign property from the domestic tax base. The Commission also recommended an order of taxing rights (i.e. which Member State has the primary right to tax the inheritance).
If all Member States that impose inheritance tax were to introduce the changes proposed in the Commission Recommendation, their application of national inheritance taxes in parallel on the same occasion and on the same taxpayer should not create as many problems ofo double or multiple taxation. In this way national inheritance tax systems would remain non-harmonised at EU level yet would at the same time become somewhat compatible from the perspective of a citizen receiving a cross-border bequest or a donation.
The Commission intends to launch a public consultation in early 2014 on inheritance tax problems and solutions and to explore how Member States have taken on board its recommendations on double tax relief. The Commission will report on the progress made and if warranted propose further solutions.
Through a Communication (COM/2011/864 ), Recommendation (2011/856/EU ) and Working Paper (SEC/2011/1488) , the Commission analyses the problems and presents solutions related to cross-border inheritance tax in the EU. For further information see the press release (IP/11/1551 ), the frequently asked questions (MEMO/11/917 ), the Impact assessment (SEC/2011/1489) , its summary (SEC/2011/1490) , and the citizens' summary . See also an article by EU Commissioner Šemeta. Copyright Society of Trust and Estate Practitioners, article first published in STEP Journal Volume20/Issue2.
Frequently asked questions
Double taxation, cross-border workers, migrant workers, pensioners