Taxation of cross-border inheritances and donations

List of abbreviations used / XV

PART I: INTRODUCTION TO DEATH AND GIFT TAXATION AND THE PROBLEMS OF CROSS-BORDER DEATH AND GIFT TAXATION

CHAPTER 1
Scope, purpose, structure and methodology used in this study / 3
1.1 The current situation / 3
1.1.1 The problems of death taxes in a domestic setting / 4
1.1.1.1 The interaction of death taxes with other types of taxes / 4
1.1.1.2 The difficulty of the public to grasp the justifications of death taxes / 4
1.1.1.3 The nature and design of death taxes / 5
1.1.2 The problems of death taxes in a cross-border setting / 5
1.2 The purposes of this study / 7
1.2.1 Description and systemisation of the law as such / 7
1.2.2 Suggestion of separate and holistic solutions / 8
1.3 Structure of this study / 8
1.4 Methodology used in this study / 10
1.4.1 “Legal-dogmatic research” / 10
1.4.2 Adding to the research in this area and the applicable approach / 12

CHAPTER 2
Death taxes and taxes on gifts / 13
2.1 Key features of death taxes and taxes on gifts / 13
2.1.1 Inheritance and estate taxes / 13
2.1.2 Other types of taxes levied upon death / 15
2.1.3 Taxes on gifts / 15
2.2 Establishment of tax jurisdiction / 16
2.2.1 Inheritance and estate taxes / 16
2.2.1.1 The personal nexus / 16
2.2.1.2 The objective nexus / 18
2.2.2 Other types of taxes levied upon death / 18
2.2.3 Taxes on gifts / 19
2.3 History of death taxes and revenue trends / 19
2.4 Justifications of death taxation / 21
2.4.1 The ability-to-pay-taxes justification (the theory of value) / 24
2.4.2 The windfall justification (the accidental income theory) / 27
2.4.3 The tax equality justification / 30
2.4.4 The diffusion-of-wealth justification / 31
2.4.5 The sluice justification / 32
2.4.6 The work stimulating justification/incentive to work justification / 32
2.4.7 The wages-for-work justification / 33
2.4.8 The justification of less pain / 33
2.4.9 The profit justification (the benefits theory and the co-heirship theory) / 34
2.4.10 The belated fee justification / 35
2.4.11 The financing of the probate costs / 35
2.4.12 Penalty for the deceased’s tax evasion (the back-taxes theory) / 36
2.4.13 The substitution for not imposed taxes justification (apart from tax evasion) / 36
2.4.14 A means for the abolition of the intestate inheritance / 37
2.5 Conclusion of Chapter 2 / 37

CHAPTER 3
The starting point of this study / 39
3.1 The problems of cross-border death and gift taxation / 39
3.1.1 Double or multiple taxation / 39
3.1.1.1 Variety of concepts determining the personal nexus between a person and a state / 39
3.1.1.1.1 Residence / 40
3.1.1.1.2 Domicile / 42
3.1.1.1.3 Nationality / 43
3.1.1.2 Assessment of the personal link with a different person (donor-based and donee-based taxes) / 44
3.1.1.3 Different taxable persons / 45
3.1.1.4 Different types of taxes / 45
3.1.1.5 Connection with civil law / 46
3.1.1.5.1 Determination of critical terms by civil law / 46
3.1.1.5.2 Private international law rules / 47
3.1.1.5.3 The EU Succession Regulation / 48
3.1.1.6 Qualification issues / 50
3.1.1.7 Divergent valuation rules / 50
3.1.1.8 Divergent debt deduction rules / 50
3.1.1.9 Situs taxation / 51
3.1.1.10 The ineffectiveness of the unilateral double taxation relief / 52
3.1.2 Double or multiple non-taxation / 53
3.1.2.1 Jurisdictional double or multiple non-taxation / 54
3.1.2.1.1 Variety of concepts determining the personal nexus between a person and a state / 54
3.1.2.1.2 Assessment of the personal link with a different person (donor and donee base) / 55
3.1.2.1.3 Connection with civil law / 55
3.1.2.1.4 Qualification issues / 55
3.1.2.1.5 Situs taxation / 56
3.1.2.1.6 Application of different types of taxes / 56
3.1.2.2 Unilateral double tax relief by the state of the personal nexus / 57
3.1.2.3 Unilateral abstention of the state of the objective nexus from taxing / 57
3.1.2.4 Double or multiple non-taxation as a result of tax abuse / 57
3.1.3 Discriminatory treatment of cross-border inheritances and donations / 58
3.1.3.1 Introduction / 58
3.1.3.2 Examples of discriminatory inheritance and gift tax provisions / 58
3.1.3.2.1 Tax deductions for certain liabilities and debts / 58
3.1.3.2.2 Subjective tax exemptions / 58
3.1.3.2.3 Objective tax exemptions / 59
3.1.3.2.4 Valuation rules / 59
3.1.3.2.5 Tax rates / 59
3.1.3.2.6 Filing deadline / 59
3.1.3.2.7 Payment deadline / 59
3.1.3.2.8 Payment requirements / 60
3.1.3.2.9 Penalties and fines / 60
3.1.4 Administrative difficulties / 60
3.1.4.1 Introduction / 60
3.1.4.2 The example of Mr D’s beneficiaries / 61
3.1.4.2.1 Problems arising in the state of the objective nexus / 62
3.1.4.2.2 Problems arising in the state of the personal nexus / 63
3.2 Confirmation of the selection of the problems / 64
3.2.1 The OECD IHTMTC / 64
3.2.1.1 An overview of the OECD IHTMTC provisions / 64
3.2.1.2 The objectives of the OECD IHTMTC / 67
3.2.1.3 Why states do not often conclude inheritance and gift tax treaties / 69
3.2.2 The 2015 inheritance tax report / 70
3.3 Addressing the problems at different levels / 71
3.3.1 The national level / 71
3.3.2 The OECD level / 71
3.3.3 The EU level / 72
3.3.3.1 Double or multiple taxation / 72
3.3.3.2 Double or multiple non-taxation / 73
3.3.3.3 Discrimination / 74
3.3.3.4 Administrative difficulties / 75
3.4 Conclusion of Chapter 3 / 76

PART II: SEPARATE SOLUTIONS TO THE PROBLEMS OF CROSS-BORDER DEATH AND GIFT TAXATION

CHAPTER 4
Separate solutions at the OECD level / 81
4.1 Introduction / 81
4.2 The four elements of the proposed inheritance and gift tax / 82
4.2.1 Mortis causa or inter vivos taxation / 82
4.2.2 The levying of the tax on windfalls / 84
4.2.3 The definition of critical terms by civil law / 85
4.2.4 The ability-to-pay-taxes justification / 86
4.3 Conclusion of Chapter 4 / 86

CHAPTER 5
The provisions of the OECD IHTMTC and its Commentary that can be improved / 89
5.1 Double or multiple taxation / 89
5.1.1 Narrow scope and subsidiary taxing rights (Articles 1,4, 7 and 9A and 9B) / 90
5.1.2 Multiple taxation (Articles 1 and 4) / 92
5.1.3 The tiebreaker rule for individuals (Article 4(2)) / 95
5.1.4 Overlaps with the OECD ICTMTC (Article 2) / 97
5.1.5 Estate and inheritance taxes (Articles 2 and 9B) / 100
5.1.6 Inheritance/estate/gift taxes and income/capital gains taxes (Articles 2 and 9B) / 101
5.1.7 Lack of common valuation rules (Articles 9A and 9B) / 103
5.1.8 Conflicts of qualification (Articles 3 and 5-7) / 105
5.1.9 The special features of the law of the Contracting States (Article 1) / 107
5.1.10 Mutual agreement procedure (Article 11) / 109
5.2 Double or multiple non-taxation / 110
5.2.1 Overlaps with the OECD ICTMTC (Article 2) / 110
5.2.2 Conflicts of qualification (Articles 3 and 5-7) / 112
5.2.3 Termination of the tax treaty (Article 16) / 113
5.3 Discriminatory treatment of cross-border inheritances and donations / 115
5.3.1 Introduction / 115
5.3.2 The OECD IHTMTC’s nationality non-discrimination provision / 116
5.4 Administrative difficulties / 117
5.4.1 Introduction / 117
5.4.2 The OECD IHTMTC’s nationality non-discrimination provision (Article 10) / 118
5.5 Conclusion of Chapter 5 / 118

CHAPTER 6
The suggested improvements to the OECD IHTMTC / 121
6.1 Double or multiple taxation / 121
6.1.1 Narrow scope and subsidiary taxing rights (Articles 1,4, 7, 9A and 9B) / 121
6.1.1.1 Primary taxing rights / 121
6.1.1.2 Subsidiary taxing right provision / 122
6.1.1.2.1 Taxation based on nationality / 123
6.1.1.2.2 Taxation based on links with beneficiaries / 124
6.1.1.2.3 Extended domicile / 124
6.1.2 Multiple taxation (Articles 1 and 4) / 127
6.1.2.1 Introduction / 127
6.1.2.2 Enhancing the effectiveness of the model in multiple taxation situations / 128
6.1.2.2.1 Nationality as a subsidiary criterion (Article 4) / 128
6.1.2.2.2 Conclusion of a multilateral tax convention (Article 1) / 130
6.1.3 The tiebreaker rule for individuals (Article 4(2)) / 131
6.1.3.1 The two aspects of the OECD IHTMTC’s tiebreaker rule that can be improved / 131
6.1.3.2 Proposed amendments / 133
6.1.3.2.1 Specific tiebreaker rule / 133
6.1.3.2.2 Specific tiebreaker rule and broadening of the scope the general tiebreaker rule / 135
6.1.3.2.3 Update of the general tiebreaker rule / 136
6.1.4 Overlaps with the OECD ICTMTC (Article 2) / 137
6.1.4.1 Introduction / 137
6.1.4.2 Article 2(1)-(3): transition from an exhaustive to an indicative list / 137
6.1.4.3 Article 2(4): addressing the parallel application of an income tax and an inheritance and gift tax treaty / 140
6.1.5 Estate and inheritance taxes (Articles 2 and 9B) / 142
6.1.6 Inheritance/estate/gift taxes and income/capital gains taxes (Articles 2 and 9B) / 143
6.1.6.1 Introduction / 143
6.1.6.2 Bridging the gap between inheritance/gift taxes and other types of death taxes and taxes on gifts / 144
6.1.6.2.1 Taxes covered (Article 2) and “in relation to the same event” (Article 9B) / 144
6.1.6.2.2 A “comprehensive treaty” and a “consolidated treaty” / 144
6.1.6.2.3 The income tax treaty practice / 145
6.1.7 Conflicts of qualification (Articles 3 and 5-7) / 146
6.1.7.1 Conflicts of qualification due to the interpretation of the treaty rules / 146
6.1.7.1.1 The defined terms – Article 3(1) of the OECD IHTMTC / 147
6.1.7.1.2 The insufficiently defined terms – the term “immovable property” / 148
6.1.7.1.3 The undefined terms – update of Article 3(2) of the OECD IHTMTC / 150
6.1.7.2 Conflicts of qualification due to differences in treaty application to the facts / 150
6.1.7.3 Conflicts of qualification due to differences in domestic law classifications / 151
6.1.8 Mutual agreement procedure (Article 11) / 152
6.1.8.1 The importance of the procedure / 152
6.1.8.2 Inclusion of arbitration clause / 153
6.2 Double or multiple non-taxation / 154
6.2.1 Overlaps with the OECD ICTMTC (Article 2) / 154
6.2.2 Conflicts of qualification (Articles 3 and 5-7) / 155
6.2.2.1 Conflicts of qualification due to the interpretation of the treaty rules / 155
6.2.2.2 Conflicts of qualification due to differences in treaty application to the facts / 155
6.2.2.3 Conflicts of qualification due to differences in domestic law classifications / 156
6.2.3 Termination of the tax treaty (Article 16) / 157
6.2.3.1 Double non-taxation before the lapse of the minimum application period / 158
6.2.3.2 Double non-taxation after the lapse of the minimum application period / 159
6.3 Discriminatory treatment of cross-border inheritances and donations / 160
6.3.1 Introduction / 160
6.3.2 Suggested improvements to the OECD IHTMTC’s nationality nondiscrimination provision / 160
6.4 Administrative difficulties / 161
6.5 Conclusion of chapter 6 / 162

CHAPTER 7
Separate solutions at the EU level / 165
7.1 Double or multiple taxation / 165
7.1.1 EU fundamental freedoms and juridical double taxation of inheritances / 166
7.1.2 The EC’s recommendation 2011/856 regarding relief for double taxation of inheritances / 167
7.1.2.1 Introduction / 16
7.1.2.2 The innovative aspects of the recommendation / 170
7.1.2.2.1 Broad scope / 171
7.1.2.2.2 Double or multiple taxation / 171
7.1.2.3 The aspects of the recommendation that could be improved / 172
7.1.2.3.1 Unrelieved double or multiple taxation / 172
7.1.2.3.2 The tiebreaker rule / 173
7.1.2.3.3 The mutual agreement procedure / 174
7.1.3 Conversion of the EC’s recommendation to an EU Directive / 174
7.1.4 A combination of a treaty-based and an EU law solution / 177
7.1.4.1 Multilateral convention for the avoidance of double taxation of estates, inheritances and donations (treaty-based solution) in the form of an EU Directive / 177
7.1.4.2 Extension of the scope of the Council Directive 2017/1852/EU (EU law solution) / 178
7.2 Double or multiple non-taxation / 179
7.3 Discriminatory treatment of cross-border inheritances and donations / 180
7.3.1 The “EU compliant inheritance and gift tax” / 180
7.3.2 The OECD IHTMTC and the EU fundamental freedoms / 181
7.3.3 Two important issues arising from the Court’s case law / 182
7.3.3.1 The non-application of the Schumacker doctrine / 183
7.3.3.1.1 Subjective tax exemptions by the EU Member State of the objective nexus / 184
7.3.3.1.2 Subjective tax exemptions by the EU Member State of the personal nexus / 186
7.3.3.1.3 Proportionate subjective tax exemptions: a fair solution? / 186
7.3.3.1.4 Objective tax exemptions / 188
7.3.3.2 Neutralisation / 190
7.4 Administrative difficulties / 192
7.4.1 The Council Directive 2011/16/EU / 192
7.4.2 The Council Directive 2010/24/EU / 193
7.4.3 The Council Directive 2017/1852/EU / 193
7.5 Conclusion of chapter 7 / 194

PART III: A HOLISTIC SOLUTION TO THE PROBLEMS OF CROSS-BORDER DEATH AND GIFT TAXATION

CHAPTER 8
A holistic solution to the problems of cross-border death and gift taxation / 199
8.1 The three solutions of the EC’s expert group / 199
8.2 Introduction to the “one inheritance – one inheritance tax” concept / 201
8.2.1 Introduction / 201
8.2.2 The objectives of the concept / 203
8.2.2.1 The three primary objectives / 203
8.2.2.2 The underlying objective / 204
8.2.3 A concept consistent with subsidiarity and proportionality / 205
8.2.3.1 The subsidiarity principle / 206
8.2.3.2 The proportionality principle / 206
8.2.3.2.1 A concept proportionate to the objectives to be achieved / 206
8.2.3.2.2 A concept proportionate to EU Member States’ fiscal sovereignty and international tax law principles / 208
8.2.4 The legal form of the concept / 209
8.2.5 Taxes covered / 210
8.2.6 Application to a cross-border inheritance / 212
8.3 The two steps of application of the concept / 213
8.3.1 Step one: the deceased’s habitual residence as a connecting tax criterion / 213
8.3.1.1 The assessment of the habitual residence at the deceased / 214
8.3.1.2 Interpreting habitual residence / 215
8.3.1.2.1 Habitual residence: an EU autonomous term / 215
8.3.1.2.2 Three interpretation approaches / 217
8.3.1.2.3 Habitual residence under the EU Succession Regulation / 218
8.3.1.2.4 Habitual residence under the concept / 219
8.3.2 Step two: single taxation / 222
8.3.2.1 Taxation by the EU Member State of the deceased’s habitual residence / 223
8.3.2.2 Taxation by any other EU Member State / 223
8.4 Application of the concept to the problems of this study / 224
8.4.1 From “obstacles” to “problems” / 224
8.4.2 An EU Directive implementing the “one inheritance – one inheritance tax” concept / 226
8.4.3 Enforcement mechanisms against discrimination / 227
8.4.3.1 Survey on the domestic rules on death and taxes on gifts / 227
8.4.3.2 Creation of an inheritance and gift tax forum / 228
8.4.3.3 Infringement procedure / 228
8.4.3.4 Introduction of compulsory rules / 228
8.5 Conclusion of chapter 8 / 229

PART IV: SUMMARY AND CONCLUSIONS

CHAPTER 9
Summary and conclusions / 233
Appendix I: A new version of the OECD IHTMTC / 245
Appendix II: Proposal for Council Directive on a multilateral Convention for the avoidance of double or multiple taxation of cross-border inheritances and gifts / 259
Appendix III: Proposal for an amendment to the Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union / 269
Appendix IV: Proposal for Council Directive implementing the “one inheritance – one inheritance tax” concept / 273

SAMENVATTING (SUMMARY IN DUTCH)
Table of reference materials / 291
Table of case law / 301
Index / 303
Curriculum Vitae / 309