Finca in Mallorca
Several hundred thousand Germans own a property in Spain, be it a small vacation apartment on the Spanish mainland or a luxury property on one of the Spanish islands. The property is bought quickly, as there is an entire industry in Spain that specializes in Germans, at least in the typical vacation regions. From local German estate agents to German-speaking financial brokers and notaries specializing in Germans, there is a wide range of service providers who work hand in hand to make it as easy as possible to buy the right property, provided you have the necessary assets.
1. settlement of estates in Spain
After an inheritance, however, it becomes apparent that the hurdles involved in buying the property are a mere trifle compared to the legal, linguistic and, above all, time requirements that the heirs now have to cope with.
Example (reproduced): In the 1980s, childless Mr. and Mrs. Müller purchase a vacation apartment on the Costa Brava. In the mid-2000s, they draw up a will. Initially, Mr. and Mrs. Müller named each other as heirs. Peter and Silke Schmidt, a younger couple who were friends and had helped Mr. and Mrs. Müller around the house and in other ways over the years, were to inherit from the longer-living spouse. On the basis of this will, Mr. Müller inherits his wife in 2013. As Mr. Müller was already in poor health at this time, he settled his wife's estate in Germany. However, he does nothing in Spain: he does not have the apartment transferred to him, nor does he report the death to any Spanish authority. He also did not inform the Spanish bank where he and his deceased wife had opened a joint account, which was and is required for the property. When Mr. Müller then dies in spring 2015, he is inherited by Mr. and Mrs. Schmidt in accordance with the instructions in their will. They apply for a joint certificate of inheritance and use it to settle the entire estate, insofar as it is located in Germany. With regard to the apartment in Spain, however, they are faced with a single question mark. They don't speak Spanish, let alone know which authorities they can and must contact, in what order, and what deadlines must be observed.
In the Müller example, as with other estate settlements in Spain, it took around a year until, after many, many phone calls and extensive correspondence with the relevant authorities in Germany and, above all, in Spain
the necessary Spanish tax number was obtained,
the offices in Madrid that had to be contacted in Spain after an inheritance case had provided information,
the German documents required for the transfer of the apartment initially to Mr. Müller as his wife's heir had been obtained,
the German certificate of inheritance for Mr. Müller was available together with a so-called apostille,
all documents had been translated into Spanish and checked by the Spanish authorities,
the so-called capital gains tax for the property had been assessed and paid in Spain,
the double acceptance of inheritance had been declared in Spain by a Spanish notary, both for Mr. Müller and for his predeceased wife,
the Spanish bank accepted Mr. and Mrs. Schmidt as the new account holders,
the Spanish inheritance tax for both inheritances had been assessed and paid,
the Spanish land register was corrected and Mr. and Mrs. Schmidt were registered as the new owners and finally
the annual income tax return for owner-occupied vacation properties had been prepared and submitted.
It is not every day that two inheritance cases have to be processed together in Spain. But even if it is "only" a case of inheritance, the procedure in Spain is complex and lengthy and cannot be managed without professional help in both Germany and Spain. Apart from this, practice shows time and again that inheritance cases in Germany are sometimes not reported in Spain for years.
2 "International inheritance tax": double taxation of German/Spanish inheritances
However, the "international estate settlement" does not end with the payment of Spanish inheritance tax. The general problem with German/Spanish inheritance cases is that the heirs are liable for inheritance tax in both Germany and Spain. There has been a double taxation agreement between Germany and Spain for decades. However, it does not cover inheritance and gift tax. Accordingly, inheritance tax is or may be payable in both countries. Spain also has the particularity that there is a national inheritance tax law. However, the various autonomous regions in Spain - roughly comparable to the German federal states, but with the right to enact largely independent laws - have each enacted legislation that differs significantly from this. Which Spanish tax law applies in an individual case depends in particular on whether and, if so, where the heir is a so-called "resident" in Spain. It becomes even more complicated when you consider that in Spain - unlike in Germany - gifts and inheritances are assessed differently and can trigger completely different amounts of tax in each case. Without multilingual advisors who specialize in the legal and tax aspects of the country in question, you are at a loss from the outset. This also applies in particular to the respective interface problems. Experience has shown that it is not enough to know the special features in Germany or Spain in isolation. If the two are not linked, a recommendation that makes sense in Germany, for example, can have catastrophic consequences in Spain.
Negative example: A German tax advisor recommends a wealthy German client to give EUR 400,000 to his son who is studying and living in Spain "to take advantage of the tax-free allowances". From an isolated German perspective, the recommendation is correct, as the tax-free allowances per child and parent here are just EUR 400,000. However, if, as in the specific example, it results in the son in Barcelona having to pay EUR 57,000 (!) in gift tax because the German tax advisor made several mistakes - for example, the tax in Spain would have been "only" EUR 24,000 if the gift had been notarized by a Spanish notary - it becomes clear that isolated knowledge is not enough in the international arena.
3 European Succession Regulation, or: Which law applies?
In the Müller example, the inheritance took place in spring 2015, but if Mr. Müller had died in autumn 2015, the legal situation would be even more complex. This is because the European Succession Regulation came into force on 17.08.2015. It regulates the question of which national inheritance law is to be applied in the event of an inheritance with a foreign connection. This sounds very technical and unspectacular at first. In reality, however, the implications are enormous. From 17 August 2015, German law will no longer be based on nationality, as was previously the case. Instead, the "last habitual place of residence" is decisive.
Example: If a German dies in Spain, it was previously clear that only German inheritance law applied. Since August 2015, however, Spanish inheritance law has been applicable if the deceased has moved the center of their life to Spain.
However, Spanish inheritance law differs significantly from German inheritance law, leading to completely different results: In Germany, the longer-living spouse plays a centrally important role. In contrast, Spanish inheritance law places the children at the center and gives the longer-living spouse a much weaker position compared to the German legal system. Inheritance law is even more different in the various Spanish autonomous regions and even more so in other European and non-European countries.
Example: If a German widower moves in with his son living in the USA, the (inheritance) law of the American state in which the elderly father dies applies.
The consequences in this example are serious. They extend to the loss of the right to a compulsory portion for the testator's other children living in Germany, namely if the father disinherits them and appoints his "American" son as his sole heir. This is because 49 of the 50 American states do not recognize a compulsory portion. Accordingly, the "transfer of the testator" - as the specialist literature aptly describes it - can override the entire German right to a compulsory portion.
4. choice of law
The European Succession Regulation is not only problematic for Germans who have their permanent residence abroad or spend several months a year there. In principle, it covers every inheritance case abroad, even if the stay abroad is only short. The new law covers in particular those Germans who, for example, spend the winter months in their home in the south and happen to die there. At least in Europe, the problem can be mitigated by the testator drawing up a will and making a so-called choice of law. Regardless of which country they live in, they can stipulate in their will that the (inheritance) law of the country to which they belong should apply. A German living in Spain can therefore choose German law. However, the possibility of choosing the law is limited again if the testator lives outside of Europe, e.g. in the USA. In this case, a conflict of laws arises which must be resolved according to separate rules.
5 Conclusion
Assets abroad are treacherous. As easy as it is, for example, to acquire a property in Spain, the pitfalls that need to be considered after the inheritance are complex, extensive and unexpected. To a certain extent, these difficulties represent a kind of invisible mortgage that is inevitably acquired at the time of purchase, which lies dormant beneath the surface and only comes to light in the event of inheritance and in a slightly different form when the property is sold. But then with full force. This is one of the golden rules in the international arena: nothing without a local specialist! This rule applies to lawyers and tax advisors and even more so to anyone who has assets abroad, e.g. the famous "finca in Mallorca".
Status: 15.11.2016