1.1.2 The problems of death taxes in a cross-border setting

The second category of problems refers to problems relating to a cross-border inheritance. In this study, a cross-border inheritance is defined as an inheritance with at least a cross-border element, e.g. the foreign location of the mortis causa transferred assets, a foreign-located deceased or a foreign-located beneficiary. In addition, a cross-border inheritance may be subject to different types of death taxes, thus not only to the same type of death tax (e.g. inheritance tax) by one or more states.

This study focuses on the following essential problems of cross-border inheritances:

The selection of these problems is confirmed by the two points of reference of this study, the OECD Model Tax Convention for the avoidance of double taxation with respect to taxes on inheritances, estates and gifts (referred hereinafter, the OECD IHTMTC or the inheritance and gift tax model or the model) and the 2015 inheritance tax report.1

In short, the parallel application of death taxes by two or more states may often result in double or even multiple taxation of a cross-border inheritance. The national tax laws differ substantially and do not always consider the international dimension of an inheritance. As a result, a unilateral double taxation relief should not always be taken for granted. Furthermore, despite the importance of this issue, it seems that hardly any progress has been made in recent years towards addressing it at the OECD level. The number of inheritance and gift tax treaties is considerably low.2 Moreover, one could argue that the OECD IHTMTC contains certain provisions that prevent the model from effectively achieving one of its purposes, i.e. to allocate taxing rights between tax jurisdictions for the avoidance of double taxation of inheritances.3 In addition, at the EU level, hardly any progress has been made towards addressing double or multiple taxation of cross-border inheritances. Double or multiple juridical taxation of inheritances is not considered a violation of the EU fundamental freedoms4 while a coordination measure issued by the EC5 in 2011 seems to have failed to achieve its purpose.

Furthermore, it is conceivable that a cross-border inheritance may be left untaxed by all states involved. This situation is called “double or multiple non-taxation” and serves as the second problem of cross-border inheritances. In that regard, I note that the model does not seem to address this problem in all instances. Moreover, as is in the case of double or multiple taxation, hardly any progress has been made towards addressing this issue within the EU.

Moreover, states may discriminate a cross-border inheritance. For example, they may pose additional requirements or deny granting benefits such as tax exemptions and allowances to inheritances with a cross-border element. At the OECD level, the wording of the non-discrimination provision of the OECD IHTMTC seems insufficient to address this issue in certain instances adequately. On the contrary, at the EU level, the Court of Justice of the EU (hereinafter: the “ECJ”, the ”CJ” or the “Court”) has already applied the EU fundamental freedoms to cross-border inheritances and donations that have been discriminated against by the EU Member States, thereby contributing to the so-called “negative harmonisation” of inheritance and gift taxes within the EU.6 The Court’s case law has brought some amount of clarity and certainty to this matter and, thus, certain principles can be distilled from this. Nevertheless, one could argue that more research is required into certain aspects of Court’s case law.

Finally, administrative difficulties may arise in the event of a cross-border inheritance for taxpayers. Arguably, the OECD IHTMTC does not address these difficulties, as it focuses only on the tax authorities’ level. Furthermore, at the EU level, EU secondary legislation on administrative cooperation7 and assistance in the collection of taxes8 already applies to death and gift taxes. However, I observe that the effects of the legislation are again limited to the tax authorities’ level.

As a final note, it follows from the suggestion of the international community to the above problems that the treatment of cross-border inheritances is often the same as that of cross-border donations. This is because taxes on gifts are often levied based on similar principles to death taxes9 and are often considered complementary to death taxes by some states.10 In that regard, I note that in the OECD’s view, an inheritance tax needs to be complemented with a gift tax (given the strategy of transferring wealth through lifetime gifts that otherwise would have been left untaxed).11 Furthermore, the OECD IHTMTC applies to taxes on gifts,12 the CJ’s case law on cross-border inheritances is applied by analogy to gift taxes and vice versa, and the EC’s coordination measure issued in 2011 applies to taxes on gifts by analogy, where gifts are taxed under the same or similar principles to inheritances. As a result, it comes as no surprise that this study also covers taxes on gifts.