Article 73b(1) of the EC Treaty (art. 56(1) EC), read in conjunction with art. 73d of the EC Treaty (art. 58 EC), precluded legislation of a member state which, for the purposes of calculating the tax on an inheritance consisting of assets situated in that state and agricultural land and forestry situated in another member state, provided that account be taken of the fair market value of the assets in that other member state, whereas a special valuation procedure existed for identical domestic assets, the results of which amounted on average to only ten per cent of that fair market value, and reserved application of a tax-free amount to domestic agricultural land and forestry in relation to those assets and took account of only 60 per cent of their remaining value.

Facts

The taxpayer, who was resident in France, was the sole heir of his mother, who died in 1998 and was last living in Germany. In addition to assets in Germany, the estate contained land in France used for agriculture and forestry. The German law on inheritance tax provided for a tax-free amount and valuation at a reduced rate for agricultural and forestry assets situated in Germany but not for such assets outside Germany. The German tax authorities determined the amount due on that basis. The taxpayer object unsuccessfully before the Finanzgericht and then appealed on a point of law to the Bundesfinanzhof. Taking the view that it was doubtful whether the provisions of German law, to the extent to which they differentiated according to the place in which the assets included in the estate or a part thereof were located, were reconcilable with the principle of the free movement of capital, the Bundesfinanzhof stayed the proceedings and referred to the ECJ for a preliminary ruling.

Issue

Whether art. 73b(1) of the EC Treaty precluded legislation of a member state which, for the purposes of calculating the tax on an inheritance consisting of assets situated in the territory of that state and agricultural land and forestry situated in another member state, treated the domestic assets more favourably than those in the other member state.

Decision

The European Court of Justice (Second Chamber) said that an inheritance was a movement of capital within the meaning of art. 73b of the Treaty, except where its constituent elements were confined within a single member state. However, a situation in which a person resident in Germany at the time of his death left to another person resident in France assets situated in those two member states and covered jointly by a calculation of inheritance tax in Germany was not a purely domestic situation. Consequently, the inheritance at issue constituted a movement of capital within the meaning of art. 73b(1) and it was necessary to examine whether the national law constituted a restriction on the movement of capital.

National provisions which determined the value of immovable property for the purposes of calculating the amount of tax due when it was acquired through inheritance might not only discourage the purchase of immovable property situated in the member state concerned and the transfer of financial ownership of such property to another person by a resident of another member state, but might also reduce the value of the inheritance of a resident of a member state other than that in which that property was situated. Furthermore, as regards inheritances, the measures prohibited by art. 73b(1), as being restrictions on the movement of capital, included those the effect of which was to reduce the value of the inheritance of a resident of a state other than the member state in which the assets concerned were situated and which taxed the inheritance of those assets.

In the present case, the national provisions, in so far as they resulted in an inheritance consisting of agricultural land and forestry situated in another member state being subject, in Germany, to inheritance tax that was higher than would be payable if the assets were situated exclusively within the territory of that member state, had the effect of restricting the movement of capital by reducing the value of the inheritance. Since the reduction in the value of the estate flowed solely from the application of the German legislation, it followed that the fact that the grant of tax advantages in relation to inheritance tax was made subject to the condition that the asset acquired by inheritance be situated in the national territory constituted a restriction on the free movement of capital prohibited, in principle, by art. 73b(1). The restriction on the movement of capital resulting from the national legislation could not be objectively justified by an overriding reason in the general interest and accordingly the relevant legislation was precluded by art. 73b(1) of the Treaty.

European Court of Justice (Second Chamber).

Judgment delivered 17 January 2008.