A ruling by the Munich tax court (3 K 2755/22 Erb) sheds exciting light on the interplay between inheritance tax and income tax

The case: Conflict between profit distribution and inheritance tax

In this case, the son inherited shares in a GmbH whose shareholders' meeting had decided to distribute profits shortly before his father's death. The profits were not paid out until after the father's death, and were therefore paid out to the son as heir.

As usual, the distribution was subject to capital gains tax and solidarity surcharge, but the son claimed that these withheld taxes reduced his inheritance tax, as he ultimately received a lower amount. However, the tax office applied the inheritance tax to the full nominal value of the profit distribution without taking into account the withheld capital gains tax and solidarity surcharge as a liability of the estate.

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The legal justification

The entitlement to profit distribution is subject to inheritance tax in the amount of the nominal value - irrespective of the taxes withheld. The capital gains tax and the solidarity surcharge are not “value-reducing circumstances” in the sense of inheritance tax, but merely represent a form of income tax that only becomes relevant in the person of the heir after the death of the testator. It is not possible to take this tax burden into account when determining inheritance tax, as the father was not a majority shareholder and therefore had no influence on the timing of the payment.

Due to the different times at which the tax arises, namely for inheritance tax purposes at the time of the father's death and for income tax purposes at the time of the distribution, there is a double burden of inheritance tax and income tax.

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Conclusion

Forward-looking tax planning is essential, especially with regard to succession. However, life does not always play along here. There are usually only a few days between the resolution and the distribution. If, in the present case, the father dies suddenly and unexpectedly between the date of the resolution and the date of distribution, it becomes clear that even the best tax succession planning remains at the mercy of the unforeseeable events of life.