Ultimate Guide on Dual Citizenship Inheritance Tax: USA & EU

A couple on the calculator thinking about Dual citizenship inheritance tax

Introduction

Inheritance taxes are triggered when a beneficiary is legally entitled to an asset transfer from the estate. These tax purposes are often associated with entitlement, like receiving a transfer consequent to death rather than the actual receiving. In many countries, the recipient might decline this right to accept the transfer, avoiding any inheritance tax burden. Such taxes are pretty complex and what complicates it further is the dual citizenship inheritance tax.

European Union thrives to uphold its treaties and prohibit discrimination against EU nationals. However, member states have the freedom not to harmonize their foreign inheritance tax. So what about the dual citizenship inheritance tax? Such structures create a complex system as two or more member states exercise their tax treaty.

In terms of the United States regime, there is no federal inheritance tax. The US does have a federal estate tax. The federal estate tax rate and gift tax of 40% applies only if a person has exhausted their lifetime combined estate tax credit of $12.06 million (2022). The structure followed in the US for dual citizenship inheritance tax is relatively straightforward. 

This article will look to bridge the gap between the dual inheritance tax in US and EU. The reasoning is because of the varied structures followed in the EU. For example, France’s dual citizenship inheritance tax system differs from that of the UK. 

USA and EU: Is a Citizen Subject to Double Taxation on Inheritance?

Involving inherited financial assets is dicey. Countries like Austria treat inheritance tax under their gift tax regime. This changes from country to country. Another factor is that the nation of residency has a trailing transfer tax regulation, especially in dual citizenship inheritance tax, as the methods remain haywire. 

Generally, a US citizen handles estate taxes on all property owned in the country or elsewhere. They are making the rebate on dual citizenship inheritance tax close to redundant.

However, there are some exceptions:

1) Property’s location

2) Double tax treaty or a double taxation agreement provides a tax credit for estate taxes paid in the United States.

3) The estate of a deceased dual citizen may be exempt from paying dual citizenship inheritance tax in both countries. There are now fifteen countries.

Income tax treaties of the United States help minimize the tax burden and prevent double taxation. For example, a treaty between the United States and Canada prevents double taxation even though they are living and receiving money as a Canadian citizen. In this case, the dual citizenship inheritance tax regime is not redundant. US has very few treaties with the countries of the EU, making the dual citizenship inheritance tax in USA and EU a growing paradigm.

Tax relief on Inheritance Tax

A provision in law or administrative procedures by which a State offers relief for inheritance tax paid in another Member State is tax relief. Such reliefs mainly come into the fold for dual citizenship inheritance tax. 

 It can be done by:

1) Including crediting the foreign tax against tax payable in that member state

2) Exempting the inheritance or portions of it from taxes in that member state

3) Or not imposing dual citizenship inheritance tax

USA Tax Regime

There is no inheritance tax in the United States, but there is an estate tax. An estate tax differs from an inheritance tax because it charges the deceased before giving any money to descendants. The inheritance tax levies the individual who inherits assets from a deceased person. One is liable to the US estate tax scheme if one dies as a US citizen, even in a foreign country. If no dual citizenship treaties exist, there won’t be inheritance tax in US and EU. The dual citizenship inheritance tax will be levied. 

Income earned in the United States is taxed, whether earned by a non-resident or a resident unless excluded by the Internal Revenue Code. Generally, tax treaty rules apply only to the part of the year during which one was a non-resident. But, there is an exception to this rule in Chapter 9 of Publication 519, US Tax Guide for Aliens.

Another exception is available to residents who establish a residence overseas. Dual citizens should consult the tax treaties to identify the clause that qualifies them for the residence test. Taxpayers under this treaty provision are eligible for the overseas earned income exclusion. The above analysis ensures that the US dual citizenship inheritance tax regime is much easier to understand. The same might not be the case when comparing the dual citizenship tax in the US and EU. 

How much inheritance is subject to tax in the US?

For 2022, the IRS threshold for estate values was $12.06 million; in 2023, the same has increased to $12.92 million. This depends on the state and the location of the estate. For example, in Maryland, an inheritance from an estate valued at less than $50,000 is exempt. Therefore, any value below this amount is exempted from estate taxes. 

EU Tax Regime(s)

It is important to remember that many member states belong to the EU. Let us look at three significant states, including the United Kingdom, which is now separate from the EU.

United Kingdom

UK chose not to implement changes to EU inheritance regulations. They gave citizens living abroad in the EU an option. In dealing with the estate based on UK inheritance tax or country of residence. It implies that UK residents who live in EU nations subject to these restrictions will have this option. The laws on dual citizenship inheritance tax in the US and EU play a role here as the US does have an independent tax treaty with the UK. 

The US – UK Estate, Gift, and Generation-Skipping Tax Treaty

Beneficiaries or heirs domiciled in the UK and the US would have been subjected to the US estate tax and the UK inheritance tax. Thus, this treaty was enforced to address these issues of domicile for purposes of limiting double taxation of inheritance or estate. Particularly, Article 4 provides for instances of domicile, and some of them are as follows; 

  1. If you resided in the US or were a citizen of the US and resided there at any time during the preceding three years, then you will be deemed domiciled in the US. 
  2. If you were domiciled in the UK under the UK laws or were treated as such for purposes of tax that are subject to the treaty, then you will be deemed domiciled in the UK.
  3. If you are deemed as domiciled at any time in both the US and the UK based on the foregoing, and (a) you were a UK national and not a US citizen; and (b) you have not resided in the US for its income tax purposes in at least seven or more of the ten taxable years ending with the year in which that period ends, then, you will be deemed domiciled in the UK at that time.
  4.  If you are deemed as domiciled in both the US and the UK based on (a) and (b) above and: (a) you were a US citizen but not a UK national; and (b) you had not been resident in the UK in at least seven or more of the ten years of UK income tax years of assessment ending with the year in which that period ends, you will therefore be deemed as domiciled in the US at that time.

France

French inheritance law is based on the French civil code and works on a residence-based basis. French inheritance tax with french law applies to all French people regardless of nationality. Forced heirship regulations need distribution of a part estate regardless of any wills. The remaining can then be allocated according to the French will. However, The laws on dual citizenship inheritance tax in the US and EU take precedence. Like the UK, France has an independent treaty with the US.

Germany

In Germany, heirs inherit the deceased’s assets and financial obligations without an executor. In comparison, forced heirship limits are not as severe in Germany. One can exclude close relatives who are natural heirs from a person’s will. However, if there is no will, European Union laws apply. What happens when a foreign resident dies without leaving a will? The law of the country they lived in for five years takes precedence. Germany, too, has an independent tax treaty with the US. These laws are making the dual citizenship inheritance tax in US and EU more robust. 

Germany – US Estate and Gift Tax Treaty

In December 1980, a treaty was made between Germany and US referred to as the “Convention between the Federal Republic of Germany and the United States of America for the Avoidance of Double Taxation with respect to taxes on estates, inheritances, and gifts.” The same was amended in December 1998 to “the Protocol to the German-American Treaty.”

The scope of the treaty’s application:

The treaty applies to: 

  • The Estates of deceased persons whose, at the time of their death, domicile in one or both of the Contracting States (Germany and/or the US)
  • Gifts of donors whose at the making of a gift were domiciled in one or both of the Contracting States(Germany and/or the US)

What are the Taxes that the treaty shall apply to?

The treaty applies to the following taxes in addition to similar taxes that relate to estates, inheritances, and gifts imposed after the date of signing the treaty in addition to, or place of, the existing taxes.

  •  In the case of the US: The Federal estate and gift tax, including the tax on generation-skipping transfers; and 
  • In the case of Germany: the inheritance and gift tax.

Are there any fundamental differences between German inheritance and gift tax and US Federal estate and gift tax? 

Germany taxes individual heirs or beneficiaries who pay the inheritance tax as opposed to the estate. On the contrary, the US taxes the estate as an entity. 

Does the double taxation agreement between Germany and the US hinder Germany from taxing assets in the US? 

No. In cases where the assets in question are named in Articles 5 to 8 of the treaty and/or the beneficiary maintains a fiscal domicile in Germany, then the Germany – US Estate and Gift Tax Treaty allows Germany to tax the inheritance. 

Need more insight into international inheritance laws and related treaties? We at Legamart have the right connections for you from a pool of international lawyers across the globe.

Can Dual Citizens Choose the Applicable System between USA and EU Tax Systems?

As already indicated, there are various income tax and foreign tax regimes. Let us look at the French, United Kingdom, and the USA inheritance law. A French resident is subject to forced heirship restrictions, including french inheritance law. One must state in the will that if one wants the laws of the United States to apply. The person must specify in which state one wants the estate probated in the United States. One must have a connection to the state through: 

1) Birthplace

2) Current place of residence

3) Property’s location

Existing Issues and Possible Solutions for Dual Citizenship Inheritance Tax

Working and owning foreign property in two countries necessitates more tax filing. Balancing the burden of double taxes is essential. Bound by the laws of two countries also entails an obligation to pay taxes in two jurisdictions. In comparison, taxation treaties do exist to assist the citizens. The approach and long-term view are nascent.

Double taxation can occur when the different member states use varied valuations for the same property. Another issue is that certain States impose high inheritance tax rates on specific groups of beneficiaries, reaching up to 80%. Many Member States have included provisions in their domestic legislation to avoid double tax. Yet, in most circumstances, such techniques would not give total relief from double taxes or inheritance tax returns.

Specific changes might include introducing credit for tax paid in another member state. One could exclude certain kinds of foreign property from the domestic tax base if all member states that impose inheritance taxes implemented the amendments.

Applying inheritance taxes on the same individual should not cause many double taxation issues. National inheritance tax systems would thus remain non-harmonized at the EU level while still being compatible from the standpoint of a citizen receiving a cross-border contribution. The dual citizenship inheritance tax in US and EU is only in a few countries. The number should now increase for a better approach

Conclusion

The dual citizenship inheritance tax is a contentious issue in public debate. One critical reason against an inheritance tax is the right to individual property. Building a family’s fortune is generational, and the government has no right to interfere.

The EU succession regulation does not cover Inheritance taxes. Determination of inheritance tax payable on an estate is by the national legislation. Heir’s country or by double taxation agreements made by the country concerned. Such agreements prohibit cross-border scenarios. However, the groundwork for future modifications is lacking.

Non-US citizens living and owning property in the US should be mindful. These estate tax schemes have possible ramifications. The preceding study shows that residency decisions may have significant tax consequences. Thus, an inheritance tax rate design should include preferential treatment of family members.

Explore the intersection of  visas, inheritance tax and immigration in Norway on our blog on Legamart.

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