Your clients don’t live in Germany. They live in Dubai, London, Vienna, Singapore. They might never have set foot in a German tax office. And yet German inheritance tax could reach across borders and take up to 50% of what they leave behind. Here is why — and what PPLI can do about it.
The Extraterritorial Reach of German Inheritance Tax
Most advisers think of Germany as a market for German residents. That is understandable but incomplete. The German Erbschaft- und Schenkungsteuergesetz (ErbStG — Inheritance and Gift Tax Act) has extraterritorial reach in two ways that directly affect non-resident clients.
First, German inheritance tax applies to the worldwide estate of any individual who was German-domiciled or German-resident at the time of death — and to any beneficiary who is German-domiciled or German-resident. If your client is a non-resident beneficiary of a German-domiciled parent’s estate, the inheritance is subject to German ErbStG. The fact that your client lives in London or Dubai is not a shield.
Second, German-situs assets — shares in German companies, German real estate, portfolios held at German custodians, and certain other German-connected assets — can be subject to German inheritance tax even where neither the deceased nor the beneficiary is German-resident. The nexus is the asset, not the person.
The Rates Are Severe
Germany’s inheritance tax rates are not nominal. They are real and material. The tax class and the relationship between transferor and recipient determine the rate.
| Relationship | Tax Class | Rate Range | Personal Allowance |
|---|---|---|---|
| Spouse / civil partner | Class I | 7% – 30% | €500,000 |
| Child | Class I | 7% – 30% | €400,000 renewable every 10 years |
| Grandchild | Class I | 7% – 30% | €200,000 |
| Siblings / nieces / nephews | Class II | 15% – 43% | €20,000 |
| Unrelated persons | Class III | 30% – 50% | €20,000 |
The €400,000 allowance per child renews every 10 years. For unrelated beneficiaries the €20,000 allowance is minimal and rates can reach 50%. Source: Erbschaft- und Schenkungsteuergesetz (ErbStG).
The €400,000 allowance per child renews every 10 years, creating a systematic lifetime gifting opportunity. For unrelated beneficiaries — business partners, companions, or second families — the €20,000 allowance is minimal and rates can reach 50%.
For large estates and for non-Class I relationships, the German inheritance tax exposure is very significant. A German-domiciled individual with a €5 million investment portfolio and three non-German-resident children faces a potential ErbStG liability running into hundreds of thousands of euros per child, after allowances.
Who Is Affected — Profiles Worth Examining in Your Book
The non-resident clients most likely to have a German inheritance tax exposure are:
- Non-resident children and grandchildren of German-domiciled parents or grandparents — regardless of whether the non-residents themselves have ever lived in Germany.
- Clients who have emigrated from Germany within the last five years — Germany can, in certain circumstances, treat recent emigrants as German-domiciled for ErbStG purposes during a transitional period.
- Non-resident clients who hold significant German-situs assets: shares in German GmbHs or AGs, direct German real estate, portfolios held with German custodians such as Deutsche Bank or Commerzbank (where the ‘situs’ of certain assets may be analysed as German).
- Non-resident clients who are beneficiaries of German-domiciled persons who have not yet engaged in estate planning.
What PPLI Can and Cannot Do for Non-Residents
PPLI does not eliminate German inheritance tax exposure. Advisers should be clear about this. What PPLI can do — when properly structured and with specialist German ErbStG counsel — is contribute to a succession planning framework that manages the timing, delivery, and amount of assets passing across the relevant relationships.
For non-residents inheriting German assets from German-domiciled parents, the primary planning tools are:
- Systematic lifetime gifting using the €400,000 Class I allowance (renewable every 10 years). A parent who gifts €400,000 to each child every 10 years removes that amount from the eventual estate at zero or very low tax.
- PPLI beneficiary designations — where proceeds can be structured to pass directly to named beneficiaries rather than through the estate — may in principle have a different ErbStG treatment to estate assets. This analysis is nuanced and requires BFH case law analysis and specialist German tax counsel confirmation. It is not a guarantee.
- Policy ownership and beneficiary structures that separate the insurance contract from the rest of the estate — subject to German tax analysis and legal advice.
No adviser should provide categorical assurances on the German ErbStG treatment of PPLI beneficiary designations without specialist German tax and legal counsel opinion. The BFH case law in this area is active and nuanced. The structure must be built with — not around — qualified German advice.
The 12-Year Rule Does Not Help Non-Residents Directly — But the Clock Can Start
Germany’s half-income rule (Halbeinkünfteverfahren) — which reduces the effective tax rate on PPLI surrender gains to approximately 23.75% for the right circumstances — applies to German-resident policyholders at the point of benefit receipt. A non-resident policyholder who surrenders a German-qualifying PPLI policy while non-resident does not benefit from the half-income rule in the same way.
However, the 12-year clock runs from inception regardless of where the policyholder is resident. For clients who are currently non-resident but plan to relocate to Germany in the future — or who are already considering German residency — the immediate planning action is to establish the PPLI policy now. Every year of delay pushes back the point at which the 12-year condition is satisfied.
For a client who is 40 today, non-resident, but planning to retire to Germany at 55: a PPLI policy established now runs for 15 years before German residency commences. From the point of German residency, both the 12-year condition (already met) and the age-62 condition will be satisfied within the policy’s lifetime. The policy is already qualifying when the German tax jurisdiction attaches.
The Simplest Non-Resident Action: Review German Connections
For advisers with internationally mobile client books, the practical starting point is a German connection review. Go through your client list and ask: who has German-domiciled parents or grandparents? Who has German-situs assets? Who has emigrated from Germany in the last 10 years? Who might relocate to Germany?
For every client with a positive answer, an ErbStG analysis should be on the table. Not necessarily a PPLI sale — but a conversation about exposure and planning options. German inheritance tax at up to 50% on unrelated persons, and up to 30% on children, is not a modest risk. It is a material planning imperative.
Germany’s inheritance tax reach does not respect borders. Neither should an adviser’s planning horizon.
Download the full Germany PPLI Whitepaper
Germany's 12-year rule is one of the most powerful PPLI tax provisions in Europe — and one of the least used. This guide covers the full mechanics: §20 EStG deferral, the InvStG black fund trap, VVG compliance requirements, and how non-residents with German-sited assets can be caught by German inheritance tax regardless of where they live. Free for professional advisers. Verified email required.