Are you a Luxembourg resident with children living, or intending to live, in France, Germany or Belgium? How can you transfer your assets in a cross-border context? Our specialists offer some explanations.
There are two aspects to consider when you are planning a donation or inheritance:
- Civil law: who can receive it and how much?
- Tax law: how much will the transfer cost?
If the transfer involves several countries, it is important to determine which law(s) apply in both cases.
Civil inheritance law is generally the law of the deceased’s country of residence. This means that the inheritance of a deceased Luxembourg resident will be subject to Luxembourg civil law. However, since 2015, it has been possible, through a will, to opt for the civil law of the deceased’s country of nationality.
One of the specific features of Luxembourg inheritance law is that, unlike in neighbouring countries, the spouse is not a protected heir for whom a portion of the estate is reserved.
In terms of tax law, various criteria are taken into account to decide which country has the right to impose tax.
In Luxembourg, inheritance taxes will apply if the deceased is a Luxembourg resident. In this case, Luxembourg will apply inheritance tax on all the deceased’s movable assets and on the immovable assets located in Luxembourg, Immovable assets located abroad will be exempt from Luxembourg tax.
If the deceased is not resident in Luxembourg but has immovable assets there, these will be subject to Luxembourg inheritance tax.
Each country has its own criteria. France and Germany apply inheritance tax if the deceased is resident in their country as well as on any immovable assets on French or German territory respectively and on the assets inherited by heirs who are resident in France or Germany.
For its part, Belgium only taxes immovable assets located in Belgium. It does not apply the principle of taxing assets inherited by heirs who are resident in Belgium.
Luxembourg has not signed any double-taxation treaties in relation to inheritance tax. This means that the heir of a deceased person resident in Luxembourg could have to pay tax in both Luxembourg and France, if the heir is resident in France.
Note that within the legally-defined limits, there is no inheritance tax in Luxembourg on transfers to a spouse or direct-line descendants or ascendants.
Let's examine in detail the case of a deceased resident in Luxembourg with heirs in France or Germany.
Your heirs live in France
In this case, France will apply French transfer duty upon death on everything they inherit, as direct-line inheritance tax in France is charged at 45%. Any taxes already paid in Luxembourg will be deducted from the inheritance tax bill in France. The same applies to gifts from a Luxembourg resident to a French resident.
A simple solution to optimise the transfer would be to make the transfer before the heirs are considered as French tax residents from the inheritance point of view, which means before they have lived in France for six years. In this case, no inheritance tax would be payable in France. However, don’t forget that once handed over, the donor no longer owns the asset, nor is it wise to divest oneself entirely of one’s wealth.
There are other solutions such as life insurance, division of property, etc. Such solutions should be put in place with due regard to the cross-border context. It would be pointless to optimise the inheritance on the French side but generate inheritance tax in Luxembourg.
As every family is unique, an individual solution should be put in place.
Your heirs live in Germany
Germany taxes the entire inheritance if the heir is a German resident at the time of death or if the heir is of German nationality and has left Germany within the last five years (even if he or she no longer has a home in Germany).
Inheritance or gift tax is also applicable if the deceased is of German nationality and has left Germany within the last five years.The same goes for donations.
Any taxes already paid in Luxembourg may be deducted from the inheritance tax bill in Germany under certain conditions.
Germany offers high tax allowances of 400,000 euros per parent per child, every ten years, Another solution is a transfer with a usufruct whereby the taxable base can be considerably reduced in some circumstances.
As in France, such solutions should be put in place with due regard to the cross-border context and applicable civil law.
All too often, Luxembourg residents think they are not subject to substantial inheritance costs. In a cross-border context, this is not the case.It is therefore important to arrange one’s estate taking these international considerations into account. Solutions exist but they need to be set up very carefully.
Every family situation is unique and every case needs to be studied individually. Please contact us so we can discuss this together.