The European Commission has decided to refer Germany to the EU's Court of Justice over its tax rules on the reinvestment of hidden reserves and its legislation on inheritance and gift tax allowances.

Under German legislation, hidden reserves can only be transferred tax-free into a reinvestment if the newly purchased assets belong to a permanent establishment in Germany. In the Commission's view, this means that a taxpayer wishing to sell certain fixed assets in order to establish himself in another EU Member State, or to expand his business activities abroad, will be at a disadvantage.

The Commission is also unhappy with German law providing for a higher tax exemption for inherited German property if the testator or the heir were resident in Germany. As a result, non-residents are subject to higher tax on inherited assets located in Germany than German residents are. The Commission is of the opinion that this provision is discriminatory and constitutes an unjustified restriction on the free movement of capital, as provided for in the Treaties.