3.1.1.10 The ineffectiveness of the unilateral double taxation relief

In light of all the problems arising from the application of national death and gift tax rules, one would expect that a unilateral relief for the avoidance of double taxation of inheritances would suffice for all potential double taxation conflicts (residence vs situs, residence vs residence and situs vs situs). Nevertheless, the effectiveness or even sometimes the availability of such relief by the state of the personal nexus should not be taken for granted.

First, not all states provide for relief for double taxation of inheritances and donations. Furthermore, such relief is sometimes granted for death taxes and not for taxes on gifts. In addition, relief may be granted only for federal taxes levied. Moreover, if relief is available, it is often granted only for the same type of death tax and tax on gifts. The state of the personal nexus may thus not grant a credit against e.g. its inheritance tax for the estate tax paid on the same property located in the other state. This, because a) the nature of the estate tax is different from that of the inheritance tax, and b) the taxable person differs. Likewise, the state of the personal nexus, which, for instance, levies an inheritance tax, may grant relief only for foreign-paid inheritance taxes and not for income or capital taxes levied mortis causa.1 Furthermore, the state of the deceased’s personal nexus may not grant relief if the other state taxes the worldwide estate based on the beneficiary’s personal nexus. This, because both states tax the worldwide estate and double taxation relief is usually available in the event of a conflict between a personal and an objective nexus.

Sometimes the extent of the relief granted by the state of the personal nexus depends on the property that it would have taxed if it were the state of the objective nexus. Therefore, if this state defines its situs rights narrowly, it will probably grant a narrow relief. Of note is that some states provide relief only for taxes on certain assets, for example, immovable property located abroad or a specific list of foreign assets.2

Moreover, the state of the personal nexus will not grant relief if the situs of certain property is under dispute. Consequently, the situs vs situs conflict – one of the three types of conflicts giving rise to double taxation – is not often addressed by the unilateral relief provisions. The same applies in the case of double taxation resulting from the residence vs residence conflict: if both states regard, for example, the deceased or the donor as a resident of their territory, they will not provide relief for the taxes levied in the other state as both states may seek to tax the deceased’s or the donor’s worldwide property.3

Furthermore, the 2015 inheritance tax report noted that the unilateral relief in some EU Member States is less efficient if the number of states involved exceeds two.4 As mentioned above, the state of the personal nexus would provide relief only for the taxes levied abroad under its domestic situs rules.

Finally, if double taxation of inheritances is relieved by a foreign tax credit, then this credit means that the tax will be paid at the higher rate of the two taxes.5 Furthermore, the credit is usually limited to the amount of the domestic tax that would be levied if the property is located in the state providing the credit (“ordinary credit”).6 Goodman argued in that regard that this might seem particularly unfair if the property is situated in two or more states other than the state of the deceased’s residence and if one of those states levies tax at a higher rate and the other at a lower rate than the state of domicile.7 Besides, the effectiveness of the double taxation relief is put at stake because of the different valuation and debt deduction rules. If the state of the personal nexus relieves double taxation using a credit, it will credit the tax levied on the foreign property as valued under its domestic valuation rules. Thus, the amount of the tax to be credited may be lower than the tax paid in the state of the objective nexus, if the latter state values this property at a higher amount. The same applies if the state of the objective nexus does not allow a deduction for any debt connected to the property located in its territory whereas the state of the deceased’s personal nexus does.