<p> Avoidance of Multiple Inheritance Taxation within Europe</p><p>By</p><p>Prof. Dr. Alain Steichen</p><p>1. Comparative (domestic) tax law 1.1. Overview Luxembourg levies two types of taxes upon transmission of property on death : « le droit de succession » and « le droit de mutation par décès ». The differentiation criteria is the residence of the decedent at the date of his death.</p><p>. “ Droit de succession” is levied on the entire net estate inherited from a person who was resident of Luxembourg at the time of his death</p><p>. “Droit de mutation par décès” is levied upon death of a non-resident, only on the real estate located in Luxembourg</p><p>The “droit de succession “ is a beneficiary-based tax. It is levied on the acquisitions received by each individual heir and hence, qualifies as inheritance tax. On the contrary, the “droit de mutation” may be characterized as an estate tax based on the transfer of Luxembourg-situs immovable property.</p><p>Transmissions of property inter vivos are subject to gift tax (droits de donation). Gift tax is not regulated by a specific law but is governed by the same legislation as the registration tax. Registration is a formality whereby a written document, a deed or a statement is recorded in a register held y the Administration de l’Enregistrement et des Domaines. Registration is compulsory for some written documents either because of the capacity of the person who drafted the deed (i.e. notarial deed) or because of the transaction evidenced in the deed (i.e. transfer of the property of real estate, lease contract, etc). Some transactions are also subject to registration even though not evidenced in a written document (i.e. transfer of the property of a real estate). Consequently, gifts are not systematically subject to registration tax (i.e. hand to hand gifts) but only if the property transmission is stated in a written document and registered either on a voluntary basis or on a compulsory basis. </p><p>The taxation of free transfer of property either on death or inter vivos is still based on laws which go back to the French revolutionary or the Dutch period. The inheritance tax is mainly based on the French law of 22 frimaire an II whereas the gift tax is based on the law dated December 27th, 18171.</p><p>Since the law differentiate the taxation of transfer on death and inter vivos, we will treat separately the related taxes in the sections below.</p><p>1 The relevant provisions of this law may be found in Code Fiscal de la Legislation Luxembourgeoise, Volume 5, Titre 2 “Droits d’enregistrement” and Titre 3 “Droits de succession et de mutation par décès” 1.2. Tax liability</p><p>Inheritance and estate tax</p><p>Inheritance tax is levied on all assets inherited upon death of a resident of Luxembourg, except immovable property located abroad. A resident of Luxembourg (un habitant du Luxembourg) is a person who has established in Luxembourg his domicile or his wealth seat (siège de sa fortune). These two criteria are not alternative but cumulative. The residence of a person is determined on the basis of facts : it is the place where the person has established his real, permanent, effective home. The nationality or the civil domicile are not relevant. The wealth seat is the place from where the assets were administrated or controlled. It is not the place where the wealth of the deceased is located. </p><p>As regards estate tax, the determining factor is the location of the real estate. Estate tax is levied on the value of the real estate located on the Luxembourg territory and inherited on the death of a person who is not considered as resident of Luxembourg.</p><p>The residence of the heirs or the legatee is not relevant : no inheritance tax or estate tax will be levied on the assets transferred to Luxembourg residents upon death of a non-resident person (except for immovable property). The Luxembourg movable assets held by a non-resident, such as accounts with Luxembourg banks, securities issued by Luxembourg companies, insurance benefits from Luxembourg life insurance, etc. will not be subject to Luxembourg tax either if they are transferred to Luxembourg resident or to non-residents.</p><p>Gift tax</p><p>Gift tax is only levied on donations, which are submitted to the Administration de l’Enregistrement et des Domaines for registration.</p><p>According to the civil law, a donation is only recognised if the contract is passed before a notary. As all notarial deeds must be registered, donations are in general subject to registration tax (gift tax). However, the civil law also recognises so called manual or hand to hand gift. Such gifts are only possible for tangible movable assets. Since a hand to hand donation is not evidenced in a written document, no gift tax will be levied. </p><p>Consequently, are subject to gift tax :</p><p> donations of real estate located in Luxembourg since it is a legal obligation to register the transfer of real estate whether this transfer is evidenced in a written document or not. Transfer of real estate located abroad will not be subject to Luxembourg gift tax even if the notarial deed is passed in Luxembourg</p><p> donations of movable assets only to the extent that these donations are evidenced in a notarial deed passed in Luxembourg, wherever the assets are located.</p><p>Indirect gifts (i.e. abandonment of usufruct right) or hidden donation are also subject to gift tax to the extent that the related transaction is stated in a written document submitted to registration. 1.3. Tax avoidance</p><p>The inheritance tax law contains several specific anti-avoidance provisions, which aim to requalify certain operations as legacy. For instance, assets transferred without any consideration during the year preceding the death of a resident of Luxembourg are deemed to be part of the estate for inheritance tax purposes except if the gift was registered and accordingly gift tax paid. Are also part of the legacy assets disposed off by the deceased during a three-month period preceding the death if the deceased held the usufruct of the assets or if the consideration for the disposal was a life annuity. A debt which is only acknowledged in the will be considered as legacy. </p><p>More generally, the law dated January 28th, 1948 introduced a reporting obligation on third parties particularly on banks and other professionals in the financial sector. Those third parties are required before transferring the content of bank safety boxes or cash deposits to inform the tax authorities about the content of the safety boxes respectively of the bank accounts. This reporting obligation does not cover inheritances, which are tax-exempt (i.e. direct line inheritance)</p><p>1.4. Determination of tax liability : Valuation and exclusions</p><p>Inheritance and estate tax</p><p>Inheritance tax is levied on the value of all property transmitted upon death of the owner. The property includes all movable and immovable assets, located within Luxembourg or not, and is determined according to the civil law rules (not according to an economic perception of the situation). The tax is levied on the net value of the property going to each heir and is not levied on the estate as a whole.</p><p>In addition to the exemptions aiming to avoid double taxation (see 2.1) and the exemption for inheritance in direct line and between spouses (see 1.5), there a numerous exemptions such as those to the Luxembourg State, social security and a number of charitable and cultural institutions. Industrial patents are excluded from the taxable basis.</p><p>Liabilities existing at the date of the death are deducted from the amount of assets transferred. Those liabilities include debt linked to the professional activity of the deceased, debts stated in legal documents including accrued interest, domestic expenses, funeral expenses, etc. </p><p>In principle the assets are valued at fair market value at the time of the death. However, for some assets (perpetual ground rent, life annuity, usufruct and bare ownership, etc) specific valuation rules apply. </p><p>With respect to estate tax, the tax is due on the fair market value of the real estate located in Luxembourg. Deduction of related charges or debts is not admitted.</p><p>Gift tax</p><p>Since the registration law does not include an exception with respect to the valuation of the gifts, the general rule apply i.e. the gift tax is levied on the fair market value of the assets transferred. The gift tax is assessed on the gross value. Deduction of charges or debts is not allowed even where the payment of the charges and debts is transferred to the donee.</p><p>1.5. Rates and tax-free base amounts</p><p>Inheritance and estate tax</p><p>The tax rate depends on the degree of relationship between the deceased and the heirs. The rates applicable to inheritance amounting to less than LUF 400,000 – Euro 9,916) are listed in table 1. The amount of inheritance tax resulting from the application of those rates is increased by a fraction for all amounts exceeding LUF 400,000 per beneficiary. This fraction varies between 1/10 (applies to amount comprised between LUF 400,000 – Euro 9,916 and LUF 800,000 – Euro 19,831) and 22/10 (for inheritance exceeding LUF 70,000,000- Euro 1,735,255). These progressive fractions apply to the total inheritance2. </p><p>There is complete exemption of inheritance tax where the total assets do not exceed LUF 50,000 – Euro 1,240. Moreover, the inheritance tax law provides for full exemption in two cases :(i) inheritance between spouses where they have living children or descendants and (ii) inheritance between direct lineal ascendants and descendants to the extent of the legal devolution. </p><p>Gift tax</p><p>The tax rate depends on the relationship between the donor and the donee. The rates are detailed in table I.</p><p>2 For example, if a person inherits from his/her brother assets amounting to LUF 1,900,000, the inheritance tax due is LUF 126,000  LUF 1,900,000*6%*1.4 ; 4/10 is the fraction applicable to inheritance comprised between LUF 1,600,000 and 2,000,000. Table I Family relationship Inheritance and Gift tax estate tax Direct line 2.5% and 5%3 1.8% (2.4% or 3%) Between spouses 5%4 4.8%5 Brothers and sisters 6% 6% Uncles/aunts and nephews/nieces 9% 8.4% Grand-uncles/aunts and grant- 10% 9.6% nephews/nieces Others 15% 14.4% 1.6. Striking features</p><p>The Luxembourg inheritance tax (“droit de succession”) differentiates from the other countries inheritance/estate tax system with respect to inheritance in direct line and between spouses. Under Luxembourg law such inheritance are tax exempt. The direct line inheritance tax exemption is, however, limited to the legal devotion. The inheritance between spouses is tax exempt provided they have children or descendants. Those exemption do not apply do the estate tax (“droit de mutation par décès”). The inheritance tax is considered in Luxembourg to be a substitute income tax, since the income received upon inheritance or donations is excluded from the income tax on the grounds of that tax not being able to cope with the particularity of the family relationship that typically exists in those circumstances, the principle being that the closer the family relationship, the lesser the taxation. The inheritance tax, unlike the income tax, is able to take the family ties into account, when determining the tax liability. In that regard, there exists almost like an axiom in the Luxembourg way of looking at things, that a) the income earner does not work only for himself, but also for his family, to which he will pass his income over at some point in time, and b) that close families (spouses, the children) do already enjoy to some extent the benefits of the income earned by the income earner whilst he is still alive (they live in the same house, use his personal wealth to take holidays, etc.). Therefore, to some extent, it could be held that the wealth that is legally transferred to the spouse and/or children upon death of the income earner is only formally transferred to them at that point in time, the economic benefits of the deceased’s assets having been passed over to his beneficiaries long time before then. Hence the absence of taxation of the wealth passed over to the spouse and/or the descendants.</p><p>2. Double tax relief</p><p>2.1. Unilateral relief</p><p>Luxembourg has not yet concluded any conventions aiming to avoid double taxation with respect to inheritance tax or gift tax.</p><p>3 On the part exceeding the legal devotion (the legal devotion is tax exempt). 4 Without descendants otherwise exemption. If inheritance tax is due, the surviving spouse benefits from an allowance of LUF 1,500,000 – Euro 37,184. 5 Rate is reduced by half if gift is made in a prenuptial agreement The internal inheritance tax law includes some provisions aiming to reduce double taxation. According to those provisions, the following assets fall outside the scope of the Luxembourg inheritance tax :</p><p> real estate located outside Luxembourg even if the deceased owner was resident of Luxembourg</p><p> movable assets located abroad provided those assets were effectively subject to inheritance tax abroad solely on the basis of the nationality of the deceased. </p><p>2.2. Double tax treaties</p><p>Luxembourg has not yet concluded any convention with regard to inheritance/estate or gift tax, since it avoids by and large the double taxation via its internal legislation.</p><p>3. EU law The Luxembourg tax rules in our opinion, although being old-fashioned, do not collide with the EU Treaty’s provisions on free movement (art 39, 43, 49 and 56-58). Non residents who are subject to the estate tax only pay taxes on real estate that is located in Luxembourg in addition to the inheritance tax they may have to pay in their country of residence. This puts non residents in exactly the same position than residents who own real estate abroad, if we assume that the foreign jurisdiction does not levy (just like Luxembourg) inheritance tax on real estate situated abroad, here Luxembourg. The same is applicable to residents of Luxembourg, especially since there exist no exit taxes that would be levied upon the change of residence of Luxembourg residents, either shortly before their death, or at all. The only criticism that may be done as regards the Luxembourg tax system is its absence of double tax treaty network. That absence may however be explained by the fact that the unilateral relief is rather comprehensive, and the absence of taxation of inheritance between spouses and descendants, that exemption also applying to non residents. 4. Case</p><p>Individual X who . Is domiciled in country A (domicile to be understood in its Anglo-Saxon meaning) . Is a national of country B that was left by the individual within the last 10 years . Is a resident of country C . Has situs property in country D . Deceased during a holiday in country E</p><p>Would your country tax if it were in the position of :</p><p>Country No Luxembourg only levies inheritance or estate tax (i) upon death of a A Luxembourg resident or (ii) upon transfer of real estate located in Luxembourg on death of a non-resident. Domicile or nationality of Country No the deceased are not part of the criteria used for levying tax. B Country Yes Inheritance tax will be levied on all the property of the deceased C except real estate located abroad</p><p>Country Yes Luxembourg will only levied estate tax on immovable property D</p><p>Country E No</p><p>Luxembourg, 8 May 2000</p>