On March 17, 2016 on the website of the Court of Justice of the European Union the opinion of Advocate General Wathelet in Case C-123/15 Max-Heinz Feilen versus Finanzamt Fulda was published (ECLI:EU:C:2016:193).

This request for a preliminary ruling, made by the Bundesfinanzhof (Federal Finance Court,Germany), concerns the interpretation of Articles 63(1) TFEU and 65 TFEU. It has been made in the context of a dispute between Mr Feilen and the Finanzamt Fulda (Fulda Tax Office) concerning the latter’s rejection of Mr Feilen’s application for a reduction in the amount of inheritance tax payable on his mother’s estate.

Does the free movement of capital guaranteed by Article 63(1) TFEU in conjunction with Article 65 TFEU preclude legislation of a Member State which provides for a reduction in inheritance tax in the case of an inheritance by persons in a particular tax class where the estate includes assets that were already acquired by persons in this tax class during the ten years preceding the acquisition and inheritance tax was assessed in the Member State in respect of this previous acquisition, whereas a tax reduction is excluded where inheritance tax was levied in another Member State in respect of the previous acquisition?

The facts of the dispute in the main proceedings and the question referred for a preliminary ruling

·             Mr Feilen, who is resident in Germany, is the sole heir of his mother, who died in 2007 in Germany, where she was last resident. His mother’s estate consisted mainly in her share in the estate of her deceased daughter, who died in 2004 in Austria, where the mother had also lived until the daughter’s death. The distribution of the daughter’s estate did not take place in Austria until after the mother’s death and so the inheritance tax on that succession, amounting to EUR 11 961.91, was paid by Mr Feilen.

·             In his tax return relating to his inheritance from his mother, which he prepared in Germany, Mr Feilen claimed the inheritance tax paid in Austria as a liability of the estate and applied for a reduction, pursuant to Paragraph 27 of the ErbStG, in the amount of German inheritance tax due. In its assessment of 28 October 2009, the Tax Office, Fulda, deducted the inheritance tax paid in Austria from the basis of assessment, but refused to allow any reduction in the inheritance tax.

·             The Finanzgericht (Finance Court) dismissed the appeal which Mr Feilen brought against the decision of the Tax Office, Fulda, principally on the ground that Paragraph 27(1) of the ErbStG presupposes a previous inheritance subject to inheritance tax under that law and there had been none in this case, since the previous acquisition of the daughter’s assets by the mother had not given rise to inheritance tax in Germany.

·             The referring court, before which an appeal on a point of law has been brought, expresses doubts regarding the consistency of Paragraph 27 of the ErbStG with EU law.

·             It observes, first of all, that the inheritance which the appellant in the main proceedings received might fall within the scope of the provisions of EU law on the free movement of capital. Indeed, inheritances, which consist in the transfer to one or more persons of assets left by a deceased person, fall within the scope of heading XI of Annex I to Directive 88/361 and thus constitute movements of capital within the meaning of Article 63 TFEU, except in cases where their constituent elements are confined within a single Member State. According to the referring court, the succession from which Mr Feilen benefited should not be regarded as a purely domestic operation, since he acquired his mother’s assets, which consisted mainly in her share of the daughter’s estate in Austria, and thus of foreign assets.

·            Secondly, the referring court states that the refusal to allow a reduction in inheritance tax pursuant to Paragraph 27(1) of the ErbStG might constitute a restriction on the movement of capital, since its effect is to reduce the value of an estate which includes an asset subject to foreign inheritance tax. However, it entertains doubts in that regard, in light of the judgment in Block (C‑67/08, EU:C:2009:92), in which the Court, in a case involving double taxation, found that there was no restriction on the movement of capital under the ErbStG because the Member States are not obliged to adapt their own tax systems to the different tax systems of the other Member States and enjoy a certain autonomy in that area, provided that they comply with EU law.

·             Thirdly, the referring court wonders about the possible justification for such a restriction. In this context, it wonders whether Paragraph 27(1) of the ErbStG establishes a difference in treatment that is permitted under Article 65(1)(a) TFEU or an arbitrary discrimination prohibited by Article 65(3) TFEU, and also whether the restriction which the ErbStG entails might be justified by an overriding reason in the public interest, namely the preservation of the coherence of the German tax system.

·             It was in those circumstances that the Bundesfinanzhof (Federal Finance Court) decided to stay the proceedings and to refer the following question to the Court:

‘Does the free movement of capital guaranteed by Article 63(1) TFEU in conjunction with Article 65 TFEU preclude legislation of a Member State which provides for a reduction in inheritance tax in the case of an inheritance by persons in a particular tax class where the estate includes assets that were already acquired by persons in this tax class during the ten years preceding the acquisition and inheritance tax was assessed in the Member State in respect of this previous acquisition, whereas a tax reduction is excluded where inheritance tax was levied in another Member State in respect of the previous acquisition?’

Conclusion

For those reasons, I propose that the Court should answer the question referred by the Bundesfinanzhof as follows:

The free movement of capital guaranteed by Article 63(1) TFEU, combined with Article 65 TFEU, does not preclude legislation of a Member State which, in the event of a bequest to a person falling within a particular tax class, provides for a reduction in inheritance tax if the estate contains an asset which, in the previous ten years, has already been bequeathed to a beneficiary falling within the same tax class and that previous inheritance was subject to inheritance tax in that same Member State, whereas it provides for no such reduction if the previous inheritance gave rise to the imposition of inheritance tax only in another Member State.

For further information click here to be forwarded to the text of the opinion as published on the website of the CJEU, which will open in a new window.

Did you know that in our section CJEU Rulings we have made a selection of rulings of the CJEU? We have organized these rulings based on the subject they relate to (e.g. Freedom of establishment, Free movement of capital, Indirect taxes on the raising of capital, etc).

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