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If a testator has committed tax evasion, the costs incurred from obtaining tax advice in relation to the supplementary tax return can be deducted from tax as estate planning costs according to a ruling of the Bundesfinanzhof (BFH), Germany’s Federal Fiscal Court (Az.: II R 30/19).
Heirs, take note: A supplementary tax return needs to be submitted by the heirs if the estate contains undeclared assets. If the heirs conceal these from the tax authorities, they may themselves be guilty of tax evasion. We at the commercial law firm MTR Rechtsanwälte note that those heirs that have yet to declare unreported income to the tax authorities should look into the possibility of submitting a voluntary declaration.
If an estate contains undeclared assets, the heirs ought to consult with experts and submit a supplementary declaration to the tax authorities. The benefit of doing so is that the costs incurred from obtaining advice in relation to the supplementary declaration can be deducted from estate tax as estate planning costs. The costs associated with the dissolution of the household and clearing the testator’s property are also tax deductible. That was the verdict of the Bundesfinanzhof in a ruling from October 14, 2020.
The testator in the case in question had generated income in Switzerland but failed to declare this in his tax returns from 2002 to 2012. The daughter, in her capacity as heir, had her deceased father’s tax returns corrected. She subsequently declared the resulting costs, together with the costs associated with clearing her father’s property, in her estate tax declaration as a liability of the estate.
The tax office did not approve of this, refusing to take the costs incurred from obtaining tax advice and clearing the property into account when determining the amount of estate tax due.
The daughter’s subsequent lawsuit was only partially successful before the relevant fiscal court, which held that the tax consultancy costs were to be accounted for as estate planning costs because the obligation to file tax returns had passed to the heir. However, the court took a different view when it came to the costs associated with clearing the property, ruling these were not tax deductible.
The Bundesfinanzhof went one step further. Ruling in favor of the heir, the court found that the clearance costs could be deducted from tax as estate planning costs. It reasoned that inspecting the household and clearing the property are directly linked to the estate.
Lawyers with experience in the field of tax law can provide counsel.