1 Legislative framework
1.1 Which legislative provisions govern private client matters in your jurisdiction?
Private client matters in Germany are governed primarily by the German Civil Code (Bürgerliches Gesetzbuch, BGB"), within the BGB the chapters Family Law and Inheritance Law are relevant.
Inheritance and gift taxation is governed by the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz, ErbStG") together with the Valuation Act (Bewertungsgesetz, BewG").
For the advice on asset protection also the Civil Code may be relevant as well as the Insolvency Code (Insolvenzordnung – InsO) and the Act on the Avoidance of Transactions (Anfechtungsgesetz).
Private foundations are regulated under the Civil Code (sections 80 et seq. BGB) with additional supervisory provisions in the foundation laws of the federal states (Landesstiftungesetze).
1.2 Do any special regimes apply to specific individuals (eg, foreign nationals; temporary residents)?
Germany does not offer a formal "non-dom" or remittance-based taxation regime. Tax liability is determined by residence and habitual abode. A limited tax liability occurs if a person who is not resident in Germany has certain domestic revenues.
1.3 Which bilateral, multilateral and supranational instruments in effect in your jurisdiction are of relevance in the private client sphere?
Germany is subject to Regulation (EU) No 650/2012 (EU Succession Regulation"), which harmonises conflict-of-laws rules on succession within most EU member states and introduces the European Certificate of Succession.
In family and matrimonial matters the applicable matrimonial property regime is generally governed by the EU Matrimonial Property Regulation, specifically Regulation (EU) 2016/1103 on the matrimonial property regime. This Regulation applies to all participating EU Member States (including Germany) for marriages concluded on or after 29 January 2019, as well as to earlier marriages, provided that a valid choice of law was made after that date.
For inheritance and gift tax purposes, Germany has only concluded double treaties for inheritance and gift tax treaties with a limited number of states (notably the United States, France, Switzerland, Denmark and Sweden), which allocate taxing rights in cross-border estate matters.
2 Taxation
2.1 On what basis are individuals subject to tax in your jurisdiction (eg, residence/domicile/nationality)? How is this determined?
Usually, individual taxation is based primarily on residence and habitual abode, not on nationality or domicile. In this case, a person is subject to unlimited income tax liability. A residence exists where an individual maintains a dwelling under circumstances indicating an intention to dispose of it. Habitual abode is generally assumed if an individual stays in Germany for more than six months, irrespective of interruptions of short duration.
Individuals without residence or habitual abode in Germany are subject to limited tax liability, taxable only on German-source income which is restrictive.
Nationality is only relevant for inheritance and gift tax where a German citizen leaves Germany and remains unlimited tax liable for five years. Further, it is relevant in case of leaving Germany and moving to a low taxation state. In this case the person is completely taxed on German-source income for ten years.
2.2 When does the personal tax year start and end in your jurisdiction?
The personal tax year for income tax purposes corresponds to the calendar year, running from 1 January to 31 December.
2.3 With regard to income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What taxes are levied and what are the applicable rates?
Tax on individual income income tax levied at progressive rates. The marginal income tax rate ranges from 0% up to 45% for very high income. In addition, a solidarity surcharge may apply at 5.5 % of the assessed income tax. Church tax may apply at 8 or 9% of the assessed income tax, depending on the federal state, if the taxpayer is a registered member of a recognised religious community.
(b) How is the taxable base determined?
The taxable base is determined by aggregating the individual's income from seven statutory categories of income (including employment, business, self-employment, investment income, rental income and capital gains), reduced by allowable business expenses, income-related expenses and personal allowances.
(c) What are the relevant tax return requirements?
Individuals are generally required to file an annual income tax return if they have income not fully taxed at source. The filing deadline is 31 July of the year following the tax year. Where a licensed tax adviser is engaged, extended deadlines apply. Tax returns are usually filed electronically with the tax authorities.
(d) What exemptions, deductions and other forms of relief are available?
The applicable reliefs include the basic personal allowance, which protects a minimum level of income from taxation, as well as allowances for children, single parents and certain dependants.
Deductions are available for business expenses, income-related expenses, pension contributions, certain insurance premiums, charitable donations and extraordinary personal burdens.
2.4 With regard to capital gains: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What taxes are levied and what are the applicable rates?
Capital gains realised by individuals are generally subject to personal income tax. However, a distinction is made between:
- Capital gains on private investment assets (notably shares, bonds, funds): these are typically subject to a flat withholding tax (Abgeltungsteuer) at a rate of 25%, plus solidarity surcharge and, where applicable, church tax.
- Capital gains forming part of business income or not realised from investments assets are taxed at the progressive personal income tax rates, up to 45%.
- Capital gains from real estate is not taxable if between the acquisition and the sale is a period of more than 10 years.
(b) How is the taxable base determined?
The taxable capital gain is generally calculated as the difference between the gain and acquisition costs, including directly attributable transaction costs. For securities, acquisition costs are determined on a Fifo basis. For business assets, depreciation previously claimed increases the taxable gain upon disposal.
(c) What are the relevant tax return requirements?
Where capital gains are subject to the flat withholding tax and fully settled at source by a German financial institution, no reporting is required.
However, capital gains have to be declared in the annual income tax return if:
- they are not subject to withholding tax,
- they arise from foreign accounts,
- they fall outside the flat-tax regime because they belong to business income or
- the taxpayer opts for assessment under the progressive tax scale.
(d) What exemptions, deductions and other forms of relief are available?
Gains from the sale of private real estate are exempt if the property was held for more than ten years, or if it was used for the taxpayer's own residential purposes in the year of sale and the two preceding years. Accordingly, gains from the sale of other private assets, like art works or gold, can be sold tax exempt if they were held for more than one year.
Losses from capital investments may be offset against capital gains, subject to statutory restrictions (notably for losses from certain financial instruments).
For substantial shareholdings held as private assets (generally at least 1%), a partial income method may apply, under which 60% of the gain is taxable and accordingly 60% of related expenses are deductible.
2.5 With regard to inheritances: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What taxes are levied and what are the applicable rates?
Inheritances are subject to inheritance tax, whilst gratuitous transfers are subject to gift tax, both under the ErbStG. There is no difference between inheritances and gifts concerning the tax burden.
Tax is levied at the level of the individual beneficiary, not at estate level. The applicable tax rate depends on:
- the tax class of the beneficiary (based on degree of kinship), and
- the taxable value of the inheritance received.
Tax rates range:
- Tax Class I (spouses, children, grandchildren): approx. 7% to 30%
- Tax Class II (siblings, nieces/nephews, parents in certain cases): 15% to 43%
- Tax Class III (all other beneficiaries, including unrelated persons): 30% to 50%
(b) How is the taxable base determined?
Valuation is carried out according to legal rules which is governed in the BewG. The general rule is that value should be equal to the fair market value:
- Real estate is valued under standardised valuation methods (not necessarily market value) as well as business assets. It is always possible to prove a lower value by appraisal.
- Financial assets are generally valued at fair market value.
From the gross value, deductible items include:
- estate liabilities (e.g. debts of the deceased) as well as liabilities that are economically related to the asset
- funeral costs and estate administration expenses (standard lump-sum or actual costs), and
- certain tax-exempt allowances.
(c) What are the relevant tax return requirements?
The beneficiary has to notify the inheritance or the gift at the competent tax authority within three month after death or execution of the gift. Notaries, courts and banks have independent reporting obligations to the tax authorities.
The filing deadline is generally upon request of the tax authority, subject to extension. Returns must disclose the assets received, valuations and applicable exemptions.
(d) What exemptions, deductions and other forms of relief are available?
The following personal allowances apply per beneficiary and per acquisition from the same person every ten years:
- spouses: EUR 500,000
- children: EUR 400,000
- grandchildren: EUR 200,000
- other beneficiaries: EUR 20,000
Additional exemptions apply for:
- household effects and personal chattels (within limits),
- owner-occupied family homes transferred to spouses or children (subject to use requirements).
Business property relief may exempt 85% or 100% of qualifying business assets, subject to strict conditions regarding continued operation, payroll and holding periods.
There are also allowances for the gratuitous transfer or inheritance of art, art collections or monuments. The inheritance or gift to a charitable entity also remains tax exempt.
If spouses are married under the statutory community of accrued gains, then the accrued gains can be obtained tax-free during their lifetime or upon death. However, this does not apply if the spouses are subject to separation of property.
Furthermore, the gift of the family home between spouses is also tax-free. In the event of transfer upon death, this also applies, but only on condition that the surviving spouse lives there for 10 years (except in the event of death or need for care). This also applies to inheritances to children if they live in the family home, but only up to an area of 180 square metres.
2.6 With regard to investment income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What taxes are levied and what are the applicable rates?
Investment income earned by individuals is generally subject to personal income tax under a special flat-rate regime (Abgeltungsteuer) at a rate of 25%, applied at source, plus solidarity surcharge of 5.5 % thereon, and church tax, if applicable (8 or 9 % of the income tax).
The flat tax applies in particular to interest, dividends, income from investment funds and most capital gains on financial assets. Certain types of investment income may instead fall under the progressive income tax rates, notably where the investment forms part of business assets.
(b) How is the taxable base determined?
Under the flat-tax regime, no deduction of actual expenses is permitted. Instead, a lump-sum allowance applies of EUR 1,000, for spouses EUR 2,000 per year. This is the downside of the lower flat tax rate.
(c) What are the relevant tax return requirements?
Where investment income is fully taxed at source by a German financial institution, it is generally excluded from mandatory tax return filing.
A tax return is required if:
- the investment income is received through foreign banks or custodians,
- the income is not subject to the flat-tax regime (because it belongs to business assets), or
- the taxpayer opts for assessment under the progressive tax scale (for example, where this results in a lower effective tax rate).
(d) What exemptions, deductions and other forms of relief are available?
There are no relevant allowances. Due to the flat tax rate there are no deductions either. Losses from investment income may be offset only against income from the same category, subject to legal restrictions, e. g. the losses from interests cannot be offset against dividends.
2.7 With regard to real estate: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What taxes are levied and what are the applicable rates?
Several taxes may arise in relation to real estate:
On acquisition, real estate transfer tax (Grunderwerbsteuer) is levied on the purchaser at rates between 3.5% and 6.5%, depending on the federal state.
Every owner has to pay real property tax (Grundsteuer) for holding the property. This is an annual tax levied by local municipalities, based on statutory assessed values and municipal multipliers.
Rental income is subject to personal income tax at progressive rates of up to 45%, plus solidarity surcharge and, where applicable, church tax.
On disposal, capital gains are subject to personal income tax if the property is sold within the statutory holding period of ten years.
(b) How is the taxable base determined?
For the real estate transfer tax, the taxable base is generally the purchase price or consideration.
With regard to property tax, the taxable base is a standardised assessed value determined under federal valuation rules, multiplied by statutory factors and municipal rates.
The taxable base of rental income results from the net rental income, i.e. revenues from rent and lease less deductible expenses (maintenance, management costs, interest, depreciation).
For capital gains, the taxable gain is the difference between the gain achieved and acquisition costs, reduced by certain transaction costs and a correction of the former depreciation.
(c) What are the relevant tax return requirements?
Real estate transfer tax is assessed separately by the tax authorities and must be paid before registration of title in the land register. The transaction is usually notified to the competent tax office by the notary.
Property tax is assessed annually by local authorities and billed directly to the property owner.
Rental income and taxable capital gains must be declared in the annual income tax return.
(d) What exemptions, deductions and other forms of relief are available?
Capital gains from the sale of private real estate are exempt from tax if the property was held for more than ten years.
The same applies for residential properties if it was used for the taxpayer's own residential purposes in the year of sale and the two preceding years, irrespective of the holding period. It can be applicable for more than one residential property.
For rental property, depreciation (generally 2 or 3 percent per annum for residential buildings, depending on year of construction) and financing costs are deductible. There are even higher depreciations available, e. g. for monumental properties or new built rental property.
Transfers of real estate between spouses or within certain family structures may benefit from exemptions from real estate transfer tax, subject to statutory conditions.
2.8 With regard to any other direct taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What are they and what are the applicable rates?
German trade tax does not necessarily concern private clients. It is a municipal direct tax on business activities, levied at an effective rate typically between 7% and 17%, depending on the local multiplier. It does not apply to private asset management, but becomes relevant where private clients operate through commercial structures or where activities qualify as a business under German tax law.
Germany does not levy a general wealth tax (Vermögensteuer), although such a tax remains constitutionally possible and is occasionally discussed politically.
(b) How is the taxable base determined?
For the trade tax, the taxable base is the business profit as determined for income or corporate tax purposes. The tax is calculated by applying a uniform federal base rate of 3.5% to the taxable profit and multiplying the result by a municipal multiplier set by each municipality.
(c) What are the relevant tax return requirements?
Trade tax is assessed and collected by the local tax authorities of the municipality in which the business is carried on. The federal tax office first determines the taxable base and issues a trade tax assessment notice, after which the municipality applies its local multiplier and issues the final tax bill.
(d) What exemptions, deductions and other forms of relief are available?
Relief from trade tax is limited. For private clients who are involved in private asset management trade tax is not relevant so that they are outside the scope of trade tax.
For individuals and partnerships, a basic allowance of EUR 24,500 applies to the taxable trade income. In addition, trade tax paid by individuals and partnerships is partially creditable against personal income tax under a statutory tax credit mechanism.
Certain businesses benefit from specific exemptions, most notably asset-managing real estate companies, which may qualify for an extended trade tax exemption on rental income, subject to strict conditions.
2.9 With regard to any indirect taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?
(a) What are they and what are the applicable rates?
The most relevant indirect tax in Germany is value added tax (VAT). The standard rate is 19%, with a reduced rate of 7% applying to certain goods and services (notably food, books and cultural services).
In addition, excise duties apply to specific goods such as energy, alcohol, tobacco and motor vehicles, at varying statutory rates.
(b) How is the taxable base determined?
For VAT, the taxable base is the net consideration paid for the supply of goods or services.
For excise duties, the base is typically determined by quantity or volume (e.g. litres of fuel, hectolitres of alcohol).
(c) What are the relevant tax return requirements?
VAT is declared by taxable persons through periodic VAT returns (monthly or quarterly) and an annual VAT return.
Private individuals generally have no filing obligations, unless they carry out taxable business activities.
(d) What exemptions, deductions and other forms of relief are available?
VAT exemptions apply to certain transactions, notably financial services, insurance services, healthcare and education.
Taxable businesses may deduct input VAT on business-related purchases.
Small businesses may opt for the small business regime, under which no VAT is charged if turnover remains below statutory thresholds. Reduced VAT rates apply to specific categories of goods and services as defined by law.
3 Succession
3.1 What laws govern succession in your jurisdiction? Can succession be governed by the laws of another jurisdiction?
Succession in Germany is governed by the German Civil Code and, for cross-border cases, by the EU Succession Regulation.
Under the EU Succession Regulation, the applicable law is in principle the law of the state of the deceased's last habitual residence, irrespective of nationality. However, an individual may validly choose the law of his or her nationality to govern the entire succession by way of a testamentary disposition. It is therefore also possible that the succession of a testator in Germany falls under a different jurisdiction. If someone dies in Germany, the German probate court has jurisdiction. However, if the testator has chosen a different law of succession, the court would have to apply that law.
3.2 How is any conflict of laws resolved?
Conflicts of laws are primarily resolved through the EU Succession Regulation, which applies in most EU member states, including Germany. The Regulation establishes a single connecting factor (habitual residence) for the entire estate and provides uniform rules on jurisdiction, applicable law and recognition of decisions. For non-EU cases or excluded matters, residual German conflict rules under the Introductory Act to the Civil Code (EGBGB) may apply. In cases within the European Union, the estate is always treated uniformly and is not divided. However, a division of estate may occur if a third country is involved. For some components of the estate, different laws apply, which can lead to conflicts between two jurisdictions.
3.3 Do rules of forced heirship apply in your jurisdiction?
German law provides for a system of forced heirship (Pflichtteil).
If children, spouses and, in certain cases, parents of the testator are excluded from succession they entitled to a monetary claim equal to half of their statutory inheritance share, payable against the heirs. In addition, German law provides for a supplementary forced heirship claim (Pflichtteilsergänzungsanspruch). Gifts made by the deceased during the ten years preceding death may be taken into account when calculating the forced share, subject to a sliding scale, so as to prevent circumvention of forced heirship rules through lifetime transfers.
3.4 Do the rules of succession rules apply if the deceased is intestate?
In the absence of a valid will or inheritance contract, statutory intestate succession rules apply.
The BGB establishes a hierarchical system based on degrees of kinship, with spouses participating alongside blood relatives according to fixed statutory quotas.
3.5 Can the rules of succession be challenged? If so, how?
From a German perspective, there are essentially the following options for contesting a will:
A will can be contested on the grounds of the testator's incapacity to make a will, i.e. if, at the time of its creation, the testator was unable to understand the meaning and scope of their declaration and to act in accordance with this understanding (e.g. due to dementia or severe mental illness).
Furthermore, a will can be contested on the grounds of error on the part of the testator, for example if they were mistaken about the content of their declaration or based their decision on false assumptions about relevant circumstances.
A will can also be contested on the grounds of fraudulent misrepresentation or unlawful threat if the testator was influenced by the behaviour of third parties to draw up the will or determine its content.
Finally, contestation on the grounds of disinheritance of a beneficiary may be considered if the testator was unaware of the existence of a beneficiary when the will was drawn up or mistakenly assumed that they had predeceased them.
Under German law, deprivation of the compulsory portion is only possible in very limited exceptional cases and is subject to strict legal requirements (Section 2333 of the German Civil Code (BGB)).
The testator may only deprive a beneficiary of the compulsory portion if the beneficiary
- attempts to take the life of the testator, the testator's spouse or a descendant,
- is guilty of a serious crime or intentional serious offence against one of these persons,
- maliciously violates a legal obligation to provide maintenance, or
- is sentenced to a term of imprisonment of at least one year without parole for an intentional criminal offence and the testator therefore cannot reasonably be expected to allow that person to share in the estate. Note that it is not sufficient that there was no contact or even a conflict between the testator and the beneficiary of the compulsory share.
4 Wills and probate
4.1 What laws govern wills in your jurisdiction? Can a will be governed by the laws of another jurisdiction?
Wills in Germany are governed by the German Civil Code (BGB) and, in cross-border cases, by the EU Succession Regulation.
Under the EU Succession Regulation, a testator may choose the law of his or her nationality to govern the entire succession. Absent such a choice, the applicable law is the law of the state of the testator's last habitual residence.
4.2 How is any conflict of laws resolved?
Conflicts of laws are resolved primarily by the EU Succession Regulation, which provides uniform rules on jurisdiction, applicable law and recognition of decisions.
The Regulation applies a principle of unity of succession, meaning that a single law governs the entire estate. For cases outside its scope, residual German conflict rules under the EGBGB apply.
4.3 Are foreign wills recognised in your jurisdiction? If so, what process is followed in this regard?
Foreign wills are recognised in Germany if they are formally valid under either the law of the place where the will was made, the law of the testator's nationality, or the law of the testator's habitual residence.
In probate proceedings, foreign wills must generally be submitted to the German probate court, often together with a certified translation. In EU cases, a European Certificate of Succession may be used to evidence heirship.
4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?
The principal limitation is the system of forced heirship, including the supplementary forced heirship claim for lifetime gifts.
In addition, testamentary freedom is limited by mandatory matrimonial property rules, public policy considerations, and general principles of good faith. Testamentary dispositions that violate statutory prohibitions or fundamental legal principles may be invalid.
4.5 What formal requirements must be observed when drafting a will?
Under German law, a will must either be:
- holographic: handwritten in full by the testator and personally signed, or
- notarial: declared before a German notary and recorded in notarial form.
Electronic wills are not recognised. Joint wills between spouses are permitted; inheritance contracts (Erbverträge) require notarisation. Note that it is not permissible to use a document that is not handwritten by the testator as a will, even if, for example, two witnesses have signed it.
4.6 What best practices should be observed when drafting a will to ensure its validity?
Best practice includes ensuring clear and unambiguous drafting, using notarial form where possible, and obtaining medical evidence of capacity in cases of advanced age or illness.
In cross-border situations, an express choice of law clause should be included. It is also advisable to coordinate the will with matrimonial property regimes and existing corporate or trust structures.
4.7 Can a will be amended after the death of the testator?
A will cannot be amended after the death of the testator.
Post-mortem modifications are possible only through interpretation by the courts or by agreement among all beneficiaries, provided no mandatory rights (such as forced heirship claims) are infringed.
4.8 How are wills challenged in your jurisdiction?
Wills may be challenged by way of formal contestation before the probate court, notably on grounds of lack of capacity, mistake, fraud or undue influence.
Challenges must generally be brought within one year from knowledge of the relevant ground. The burden of proof lies with the challenger and is, in practice, difficult to discharge.
4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?
In the absence of a valid will or inheritance contract, statutory intestacy rules under the BGB apply.
The estate passes according to a system based on degrees of kinship, with spouses inheriting alongside blood relatives. Intestacy rules themselves cannot be challenged, but their application may be disputed in court where heirship or family status is contested.
5 Trusts
5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?
German law does not recognise trusts as a legal institution. There is no German trust law comparable to common law jurisdictions. Germany has not ratified the Hague Convention on the Law Applicable to Trusts and their Recognition of 1 July 1985, meaning that the general provisions of German private international law must be applied to determine the applicable law. Trust structures are not recognised under civil law in Germany; in particular, the division of ownership into legal and beneficial ownership is alien to German law.
An equivalents exist, in particular private foundations under sections 80 et seq. BGB, as well as fiduciary arrangements. Trusts may, however, be governed by foreign law (e.g. English, Jersey or New York law), and such governing law is generally respected in cross-border situations.
5.2 How is any conflict of laws resolved?
From a German perspective, the classification under conflict of laws differs in particular depending on whether it is a testamentary trust or an inter vivos trust.
As a rule, a testamentary trust is classified under inheritance law, so that the provisions of the EU Succession Regulation are generally applicable. Unless the testator has made a choice of law, the testator's last habitual residence is generally decisive. If the testator had his last habitual residence in Germany, German law is therefore applicable to the trust. Since German law does not recognise the legal institution of the trust, the testamentary trust must be reinterpreted as the German legal institution that comes closest to it (Section 2084 BGB). The result of the reinterpretation depends on the specific structure of the trust in each individual case. An example of this would be the combination of preliminary inheritance (Vor- und Nacherbschaft) with the simultaneous arrangement of a permanent execution of the will.
In the case of an inter vivos trust, the transfer of assets to the trust takes place during the lifetime of the settlor. There is disagreement regarding the classification under conflict of laws. A distinction must be made between establishment, administration and termination, as well as the personal legal relationships of the parties involved. If it is concluded that German law is applicable, a reinterpretation must be made. As a rule, a fiduciary relationship will probably come closest to the trust constellation.
5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?
The main structures used in practice are:
- Private foundations: legally recognised, strong asset protection, high credibility, but rigid structure and ongoing regulatory supervision;
- Fiduciary arrangements: flexible and simple, but weaker asset segregation and potential tax risks;
- Foreign trusts: flexible and internationally familiar, but not recognised as such under German civil law and subject to complex tax treatment;
- Permanent Executorship: The heir receives the assets directly, but the executor administers the assets:
- Preliminary heirship: The preliminary heir (Vorerbe) inherits the estate first but is subject to significant restrictions, as the assets must be preserved for the subsequent heir (Nacherbe), who becomes full heir upon the occurrence of a specified event (typically the death of the preliminary heir). This structure is commonly used to protect family assets, ensure succession across generations and limit the disposal rights of the first heir.
5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?
Foreign trusts are not recognised as trusts under German civil law. Instead, they are re-characterised under German legal concepts, typically as contractual, fiduciary arrangements.
In practice, German authorities and courts analyse the trust deed to determine who is economically entitled to the assets, particularly for tax and insolvency purposes. There is no formal recognition procedure comparable to probate or company registration.
5.5 How are trusts created and administered in your jurisdiction?
Cf. 5.4
5.6 What are the legal duties of trustees in your jurisdiction?
Cf. 5.4
5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?
For the taxation of trusts, different rules apply. Trusts are subject to a special tax regime under German tax law, irrespective of their civil law non-recognition.
German tax law distinguishes between transparent and opaque trusts:
- In transparent trusts, assets and income are attributed directly to the settlor or beneficiaries.
- In opaque trusts, the trust is treated similarly to a separate taxable entity. If a trusts generates domestic revenues, it can be subject to German corporate tax.
Transfers into trusts may trigger gift tax. Distributions to the beneficiaries may be subject to income or inheritance tax.
However, there are CFC rules (imputed taxation) applicable if the trust is opaque.
If the beneficiaries of the trust are subject to unlimited tax liability in Germany, they may be subject to imputed taxation in accordance with Section 15 of the Foreign Tax Act (AStG). This applies to the settlor of the trust, but also to beneficiaries and persons entitled to receive payments. The legal consequence of imputed taxation is that the income is attributed to the beneficiaries, even if they have not received any distributions. This represents a liquidity burden for trust beneficiaries.
There are recent developments that the provision with regard tot he CFC rules for trusts and foreign foundations will be amended. One aspect is that the severe provisions shall only be applicable to trusts or foundations that qualify as artificial arrangement in tax law which should not be the case for private clients that are involved in a testamentary trusts for generations.
5.8 What reporting requirements apply to trusts in your jurisdiction?
Trusts with a German nexus may be subject to:
German tax reporting obligations: Although the trust is not subject to corporate tax in Germany, the beneficiaries resident in Germany must submit a special declaration for the trust in which the revenues are determined. They are then allocated proportionally to the beneficiaries resident in Germany.
In principle, there is no general obligation for the beneficial owners of the trust to be entered in the German transparency register. This is only the case if the trustee is resident in Germany, which is not normally the case. Incidentally, this would also lead to unlimited corporation tax liability.
Failure to report can lead to significant penalties.
5.9 What best practices should be observed in relation to the creation and administration of trusts?
From a German perspective, best practice includes:
- conducting a full German tax and civil law analysis before establishing or joining a trust for German residents,
- ensuring clear documentation of control and beneficiary rights,
- avoiding structures that may be reclassified as abusive or artificial, and
- considering German foundations as an alternative where long-term asset holding or succession planning is intended.
In cross-border cases, coordination between foreign trust counsel and German private client advisers is essential to avoid unintended legal and tax consequences.
6 Trends and predictions
6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
In Germany, the private client market is currently characterised by
- cross-border estate planning driven by mobility and mixed-nationality families,
- increased dispute intensity in succession and family wealth matters, and
- increased compliance requirements (beneficial ownership, anti money laundering, sanctions, reporting).
The exit tax is problematic for international mobility, especially for private clients. This applies to individuals who hold at least 1% of a corporation (regardless of whether it is a German corporation).
In this case, when moving to another country (both within the EU/EEA and to third countries), hidden reserves are taxed without deferral, but with the possibility of a seven-year instalment payment plan. This results in a certain degree of lock-in.
Furthermore, tax concessions apply in Germany to business assets in the area of inheritance tax. A decision by the Federal Constitutional Court is expected on whether the inheritance tax concessions for companies are in line with the constitution. Depending on the outcome of the ruling, this could also lead to a comprehensive inheritance tax reform.
7 Tips and traps
7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?
German inheritance law offers various institutions for regulating voluntary succession. It is generally advisable to check whether intestate succession will lead to the desired result. If several persons inherit equal shares, they form a community of heirs, which must make decisions jointly. This potentially lengthy process can be simplified and made more flexible by means of a testamentary provision.
However, it should be noted that it is hardly possible to withdraw the compulsory portion. It is possible to make gifts during one's lifetime, in which case the compulsory portion would be reduced and, ten years after the gift was made, the gift would be exempt from the compulsory portion. However, it should be noted that the testator may no longer have any rights of use, i.e. an absolute separation from the assets is necessary.
In the case of international estates, civil law must take into account which inheritance law applies and whether there is a conflict in the application of the law, particularly in third countries. This should be clarified in advance in the will. It should also be noted that the EU Succession Regulation only regulates the application of substantive law, but not the jurisdiction of the court. This should also be taken into account during one's lifetime in order to avoid a foreign probate court applying German inheritance law.
Furthermore, Germany has only a few double taxation agreements for inheritance and gift tax. Double taxation may therefore occur, so this risk should also be ruled out through structuring before inheritance occurs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
