3.1.1.5.2 Private international law rules

In the case of a cross-border inheritance, the private international rules will be first considered for the determination of the applicable civil law, which will then also define some of the terms used for death tax purposes. Most legal systems contain private international laws that apply to a cross-border succession and determine which civil law governs the deceased’s succession in the absence of international conventions.1 In the case of a cross-border succession, therefore, those rules will apply first and indicate the relevant succession laws based on a chosen connecting factor. It is important to note that the private international rules do not indicate the death tax law governing the succession at hand, but only the relevant succession laws. In most states, the deceased’s residence or domicile serves as the connecting factor2 indicating the applicable succession laws. Accordingly, if the deceased was residing in State A at the time of his death, the succession laws of this state will apply. In some other states, the deceased’s nationality indicates the applicable law of succession. Accordingly, if the deceased was a national of State B at the time of his death, the succession laws of this state will apply, regardless of his residence/domicile.

The choice of the connective criterion falls within the competence of the states, and each of the two above-mentioned connecting factors has its advantages and disadvantages. More specifically, the deceased’s residence/domicile as a connecting factor dodges the application of foreign law by domestic courts, which might be difficult, especially for the administration of the estate.3 On the other hand, the deceased’s residence/domicile is prone to abuse by individuals who may immigrate to states with more favourable succession laws. This activity is often referred to as “succession law shopping”. It was argued that such an abusive behaviour could be addressed if the deceased’s nationality is taken as the connecting factor: the determination of the deceased’s nationality is straightforward and does not involve multiple interpretations of the concept of residence.4 According to Maisto, the advantages and disadvantages of each connecting factor make it hard to take a firm view on the most desirable connecting factor. He observed, however, that it is reasonable to endorse the prevailing view backed by scholars, which states that the connecting factor should be the deceased’s nationality with the deceased having the right to designate the law of his residence as the civil law applicable to his succession.5

As noted above, the private international rules do not indicate the applicable tax laws. Instead, states apply their domestic death tax laws even if they (must) apply a law on succession of another state. I elaborate on this using the following example:

At the time of his death, the deceased was a resident of State A and his beneficiaries of state B. His property consisted of three apartments in state B. The deceased left no last will, therefore, intestate succession applied. According to State A’s private international laws, the applicable law on succession is that of the deceased’s last residence. State A will subsequently apply e.g. its inheritance tax laws on the worldwide inheritance as the deceased had a personal nexus with its territory. On the other hand, State B will apply its domestic succession laws based on the lex rei sitae6 and then seek to levy e.g. inheritance tax based on the objective nexus, as seen by the example below.

If, however, the applicable civil laws differ with regard to, for instance, the term “beneficiaries”, double taxation is possible, as states will not grant double tax relief for a foreign tax paid by a person who is not considered a beneficiary under their domestic law of succession.