Anticipating Legal and Tax Challenges for International Inheritances and Gifts in the Era of the Great Wealth Transfer

An Economic Shift Underway: The Great Wealth Transfer

In the coming decades, the world is set to witness the largest intergenerational wealth transfer in history. Dubbed the "Great Wealth Transfer," this unprecedented phenomenon will see substantial assets shift into the hands of younger generations, reshaping economic balances. Globally, this monumental movement is estimated to reach $18.3 trillion by 2030, including $3.5 trillion in Europe (Source: Wealth-X, “Preservation and Succession: Family Wealth Transfer 2021”). The repercussions will be profound, particularly in the financial advisory and wealth management sectors.

Moreover, increasing international mobility adds layers of complexity. According to a 2010 CNUE study, 8 million Europeans were already living outside their country of origin, and 2.5 million real estate properties were owned by individuals residing in a different state than where their property was located. These figures have likely risen since then, driven by the intensification of cross-border exchanges within the European Union and beyond.

For example, in 2023, 1.69 million French nationals were living abroad, representing a 0.5% increase compared to the previous year. Simultaneously, 5.22 million foreigners accounted for 7.7% of the population in France as early as 2021 (Source: The French Ministry of the Interior, Immigration in France: 2021 Census Data, 25 october 2024). These migratory flows reflect the growing internationalization of wealth, thereby complicating fiscal and inheritance issues.

The Evolution of International Mobility: A Challenge for the Taxation of Wealth Transfers

The international mobility of individuals has evolved significantly over the decades. It is no longer limited to long-term and often permanent migrations—such as those observed after World War II—but now encompasses a wide range of temporary movements. These include professional motives, such as expatriation, secondments, or pluriactivity, ranging from short to long-term stays.

This transformation is accompanied by increasing competition among states, which are implementing specific tax regimes to attract various profiles: expatriates, high-net-worth individuals, and, more recently, temporary residents like digital nomads. This international tax competition is reshaping the life plans of individuals and families.

These developments have major implications for international inheritances and gifts. The geographical dispersion of heirs relative to the deceased's last place of residence, cross-border donations involving donors, beneficiaries, and assets located in multiple states, as well as the internationalization and digitization of wealth—particularly with the rise of digital assets—have significantly increased the complexity of these matters. A single inheritance or gift may now be subject to the laws of multiple jurisdictions simultaneously, making specialized expertise essential to secure these wealth transfers effectively.

Definition and Legal Framework for International Inheritances and Gifts

A succession or donation is considered international when it involves one or more cross-border elements, such as the residence of the deceased or donor, the location of the transferred assets, or the residence of the heirs or donees. These situations trigger the application of laws from two or more states, which can lead to conflicts of laws or jurisdictions.

From the perspective of civil succession law, the challenges associated with these cross-border transmissions have been significantly mitigated thanks to European harmonization. Several legal instruments have established a common framework within the European Union:

• Regulation (EC) No. 593/2008, concerning the law applicable to contractual obligations (relevant to gifts);
• Regulation (EU) No. 650/2012, known as the "Succession Regulation," which provides uniform rules for international inheritance;
• Regulation (EU) 2016/1103, which governs matrimonial property regimes in a cross-border context.

These regulations have considerably simplified the management of international inheritance and gifts by harmonizing civil law rules within the European Union. However, it is important to note that they do not address any tax issues. As a result, the tax aspects of international transmissions remain subject to the national rules of each state, potentially leading to double taxation or inconsistencies in the application of inheritance and gift taxes.

International Tax Law on Inheritances and Gifts: A Complex Puzzle

International tax law on inheritances and gifts resembles a complex puzzle, where each state applies its own fiscal rules. In most cases, these rules come into play whenever a connecting factor links an inheritance or gift to the state in question.

Let’s take a concrete example: an inheritance may be taxable in France because the heir resides there, in Portugal as the last habitual residence of the deceased, and in Denmark due to the location of a real estate asset included in the estate. This situation perfectly illustrates the "jungle" of double (or even triple) taxation risks, where uncertainty prevails regarding the final tax burden. To paraphrase Guns N’ Roses: Welcome to the Jungle of international taxation of inheritance and gifts.

Disparities among European tax systems further amplify this complexity. Some states, such as Sweden and Austria, impose no taxes on inheritances and gifts. Others apply moderate rates, like Italy, which levies a 4% tax on children and spouses, accompanied by a generous exemption of one million euros per beneficiary. On the other hand, some states enforce particularly high marginal rates, such as France (up to 45% or 60%), Germany (50%), and even the Brussels region in Belgium, where rates can reach a staggering 80%.

The OECD and International Wealth Transfers: Limited Progress in Harmonization

The OECD has proposed a bilateral convention model aimed at avoiding the double taxation of inheritances and gifts. However, the number of such conventions that have been successfully concluded and are currently in force remains extremely limited. According to the IBFD, only about a hundred such agreements exist worldwide. For instance, France has signed only around thirty tax treaties applicable to inheritances and a mere nine covering gifts.

While international taxation of wealth transfers, particularly for High Net Worth Individuals (HNWI)—a term originating in the American financial world to designate wealthy individuals—is often managed by experts such as bankers, family offices, and other market professionals, the lack of fiscal harmonization within Europe remains a significant issue. It acts as a barrier to the free movement of individuals and imposes considerable costs on the majority of taxpayers.

The financial impact of an international inheritance or gift can, however, be anticipated. Taxpayers are strongly encouraged to seek advice from specialized professionals who can analyze the complex interplay of different tax jurisdictions. Such preparation helps mitigate the risks of double taxation and ensures optimal wealth transfer planning.

Anticipating the "Great Wealth Transfer": A Global and Strategic Approach

Navigating the "Great Wealth Transfer" requires a deep understanding of inheritance law and the international taxation of wealth transfers. However, beyond technical expertise, it is essential to provide clients with a comprehensive and coherent vision that incorporates the family values and objectives underlying every wealth transfer decision.

To anticipate these complex challenges and ensure a successful transfer, heirs and donors, together with their advisors, must adopt rigorous planning. This approach must combine legal and tax expertise while respecting family objectives and compliance requirements.

In an era of enhanced tax transparency and automatic information exchange, tax authorities, particularly the French tax administration, now have powerful tools to detect assets held abroad. As outlined in our December 19, 2024, article (“Foreign Accounts, Digital Assets, and Life Insurance: Master Your Reporting Obligations to Avoid Hefty Penalties”), the French tax administration can access banking information on foreign investments, cadastral data on overseas real estate, and question taxpayers about acquisitions, whether through purchase, inheritance, or gift.

Technological advancements, combined with the expansion of automatic information exchange mechanisms, point to a significant increase in tax audits and adjustments in the coming years. Thus, partnering with specialized professionals is essential to anticipate these developments and ensure optimal and compliant management of wealth transfers.

At TaxLhab, Excellence in International Wealth Transfers

At TaxLhab, we combine cutting-edge expertise in international wealth taxation with an in-depth mastery of inheritance law to assist our clients in their cross-border wealth transfer projects.

Beyond our technical know-how, we place emotional considerations and family interests at the core of our approach. Through attentive listening and personalized service, we build long-lasting relationships of trust with our clients, helping them navigate the often complex and sensitive challenges of wealth management and transfer.

Contact us: contact@taxlhab.com.