Death and Taxes: Analysis and Comparison of Bilateral International Succession TaxTreaty Structures Between the United States and Selected OECDStates

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Department of Law Spring Term 2019

Master Programme in International Tax Law and EU Tax Law Master’s Thesis 30 ECTS

Death and Taxes

Analysis and Comparison of Bilateral International Succession Tax Treaty Structures Between the United States and Selected OECD States

Author: Alex Galle-From

Supervisor: Katia Cejie

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1. Abbreviations

Art: Article

BNA: The Bureau of National Affairs, Inc.

Denmark Treaty: The Convention Between the Government of the United States of America and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances, Gifts and Certain Other Transfers, Signed 4/27/83.

DKK: Danish krone

Dutch Treaty: CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES, Signed July 15, 1969.

E.g.: Exempli gratia

EY: Ernst & Young

Finland Treaty: CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES, signed March 3, 1952.

GST: Generational Skipping Transfer

GSTT: Generational Skipping Transfer Tax

I.R.C.: Internal Revenue Code

OECD: The Organisation for Economic Co-operation and Development

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4 US: United States

USD: United States Dollar

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2. Introduction

What happens when we die? While a potent philosophical question for some, when it involves wealth and the passing of wealth to others it becomes quite a practical issue. As questions of who gets what and when are pressing concerns for many decedents and survivors, the question of how much of the transferred wealth the government will retain is also important.

Taxes on wealth passed on at death, such as estate or inheritance taxes (generally referred to as “succession taxes” or “succession tax” when appropriate, hereinafter) are nothing new—the first succession taxes date back to the Roman Empire.¹ In the modern era, many countries impose succession taxes of various rates. The Tax Foundation in 2015 listed 44 nations with succession taxes with a top rate to a lineal heir of over 1%, with 19 of those nations being OECD States.² Top succession tax rates in the OECD range from 4% in Italy to 55% in Japan.³

These succession taxes may be imposed based on domicile or citizenship of the decedent or recipient, or the situs of the property being transferred. This leads to a risk of double taxation when property is transferred between States, or when more than one state lay claim to taxability of property at death. To mitigate this risk, many countries have entered into succession tax treaties with one another.⁴

Much has been written in English describing succession taxation regimes worldwide as well as comparing and contrasting these succession

1 INHERITANCE TAX, ENCYCLOPAEDIA BRITANNICA

2 Alan Cole, ‘Estate and Inheritance Taxes around the World’, Tax Foundation (available at https://files.taxfoundation.org/legacy/docs/TaxFoundation_FF458.pdf).

3 Id. Tax rates based on top tax rate on transfers to lineal heirs.

4 See, e.g. IRS, Estate & Gift Tax Treaties (International)

https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties- international (last retrieved on June 6, 2019).

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6 tax schemes with one another.⁵ However, there is a lack of literature focused on comparison of bilateral tax treaties for the elimination of double taxation on succession taxation entered into between States that impose such succession taxes, and issues of double taxation that may arise despite existing treaties. Part of the reason for the lack of literature may be the difficulty of finding relevant documents—for instance, the author was only able to find the original text to the United States-Denmark bilateral succession taxation treaty by reviewing legislative records of the United States Legislature available on Westlaw,⁶ and links to all succession tax treaties seem to have been removed from the United States Department of State website, despite being referenced therein.⁷ This thesis will compare bilateral succession tax treaties of selected OECD States and the OECD 1983 Model Double Taxation Convention on Estates and Inheritances and on Gifts with one another, and examine their effect or lack of effect on potential double taxation of property. It will then seek to provide some context and analysis regarding potential positives and negatives to different treaty approaches.

The author has limited the scope of this thesis to bilateral succession tax treaties between the United States, on one side, and Denmark, Finland, and Norway respectively on the other. While researching this topic, it became evident that the number of treaties would need to be restricted for this Thesis to fit within the size constraints, due to the complexity of both succession taxation schemes and the associated treaties, which necessitated extensive

5 See, e.g. EY, Worldwide Estate and Inheritance Tax Guide (2018)

https://www.ey.com/gl/en/services/tax/worldwide-estate-and-inheritance-tax-guide--- country-list (last retrieved on June 5, 2019).

6 T.I.A.S. No. 2595 (Dec. 18, 1952).

7 See, e.g., IRS, ‘Estate & Gift Tax Treaties (International)’,

https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift-tax-treaties- international (last retrieved June 6, 2019), listing bilateral estate and gift tax treaties between the United States and other countries, and linking to “the full text of U.S. tax treaties” at https://www.irs.gov/businesses/international-businesses/united-states-income- tax-treaties-a-to-z, where no such treaty text exists.

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7 discussion of both the rules underlying the various succession taxes as well as treaty laws to lay the foundation necessary to compare treaties. These countries were chosen as they represent a cross-section of different various potential treaty issues and possible solutions within OECD States, solving double taxation by a variety of domicile and situs rules. The variety in the selected treaties range from treaty coverage of both estate and gift taxes versus coverage of estate taxation only; double taxation relief based on rules around where the situs of property versus double taxation relief based on domicile of the decedent or beneficiary; and the difficulties in dealing with two countries that both subject succession tax liability on the basis of citizenship, regardless of domicile. Choosing to limit the scope to treaties that held the United States on one side ensured that the treaties were easily accessible in the English language and usage of second-hand translations was not required, as well as anchoring analysis of one side of the treaties in a culture and tax regime that is familiar to the author.⁸ Additionally, the author is knowledgeable—to a lesser extent—with European and particularly Scandinavian legal systems, which made treaties with Denmark and Finland appealing targets for analysis.

The legal methodology used in this thesis is best described as a structural comparative legal method flavored at times with a legal dogmatic approach, focusing on the structures underlying the elimination of double taxation in the different bilateral tax treaties. The comparative legal method has been primarily used to compare domestic laws of different States, but it is my opinion that the methodology can be applied to great effect to compare the methodology of tax treaties between related States. Hermeneutiks may be

8 See, e.g. Mark Van Hoecke, 'Methodology of Comparative Legal

Research', LaM december 2015, DOI: 10.5553/REM/.000010 “It is also risky to involve legal systems with legal cultures one is not familiar with, at least to some extent, at the start of the research project.”

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8 used—behind the scenes, due to limitations of scope and space—when necessary to interpret provisions of the treaties due to a lack of administrative interpretive guidance.

This analysis will be effectuated by first giving an overview of the general principles and mechanisms of succession tax laws and related tax rules, such as gift taxes, followed by a high-level general explanation of succession and related tax systems of the selected countries at issue.

Following this discussion, the various bilateral treaties will be parsed, and the relevant technical provisions will be translated to plain English to the greatest extent possible. While examining these treaties, the thesis will focus on the principles and structures underlying the mechanisms and only embark on detailed analysis of specific provisions or exceptions to general rules within the treaty structures when necessary to provide a baseline understanding of the provisions. Finally, a comparison will be made between the different treaty methodologies and parallels will be drawn between similarities that arise, differences will be contrasted, and the positives and negatives arising between the various structures will be discussed. The materials that will be relied on will be primarily treaty texts, statutes, and secondary sources.

This thesis will mainly use the Bluebook method of citation, which is the customary legal citation method used in the United States. The author may vary slightly from the Bluebook method when alternate custom, practicality, or ease of understanding dictate.

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3. Overview of Succession and Gift Taxes

3.1 Estate, Inheritance, and Gift Taxes Generally

Estate taxes—which are also referred to as death taxes⁹—are a tax on property, both real and intangible, that is transferred to another person upon death (with the exclusion, generally, of the spouse of the deceased).¹⁰ They may also be structured as a tax on inherited assets, known as an inheritance tax, which is paid by the person inheriting the assets.¹¹ These taxes are often structured in a way that only wealthy persons or families will be subject to a large tax liability, whether through usage of a progressive tax rate scheme or via deductions.¹² Estate taxes are also generally paired (informally) with other taxes to prevent the use of loopholes to avoid the estate taxes, such as gift tax (taxes on gifts of property) and generational skipping transfer tax (taxes on transfers of property between “skip generations,” e.g. parent to grandchild).¹³ The policy purposes behind estate taxation are to raise revenue for the government while also preventing large amounts of wealth to be accumulated and passed on to other persons without exposure to taxation.

A taxable event generally occurs either at the time that a person dies holding taxable property in one or more other States or at the time that a person receives a taxable inheritance from a decedent. Another related taxable event may arise when a gift is given by a person to a different non- spouse person, and sometimes an additional tax on gifts to a person more than one generation away from the gift-giver. This type of tax on gifts is

9 TAX, Black's Law Dictionary (10th ed. 2014)

10 See, e.g. IRS, Estate Tax. https://www.irs.gov/businesses/small-businesses-self- employed/estate-tax. Last retrieved May 19, 2019.

11 TAX, Black's Law Dictionary (10th ed. 2014)

12 See, e.g. the United States estate tax scheme (I.R.C. §§ 2001-2210).

13 Id.

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10 designed to prevent avoidance of estate or inheritance tax from being imposed on each taxable generation.

Double taxation may occur when two States both have a succession tax, a taxable event occurs, and one of the following occurs: a decedent is liable for estate tax in two States by reason of their citizenship, domicile, or situs of property; a decedent wishes to devise a gift from one state to another, and either the decedent is liable in both States by reason of their citizenship or domicile, or both the decedent and recipient are liable, e.g. decedent is liable for an estate tax in state A, and the recipient is subsequently liable for an inheritance tax in state B on the same amount gifted from and liable for tax within state A.¹⁴

3.2 Estate/Gift Taxation by Country 3.2.1 United States of America

3.2.1.1 Estate Taxation of US Citizens

The estate tax in the United States of America applies to “property or assets that are transferred from one individual to another after death.”¹⁵ It is functionally a flat rate tax, with a 2019 tax rate of 40% on transferred property.¹⁶

The estate tax is imposed on all US persons, but functionally applies only to estates valued at over $11.2 million USD per person, or $22.4 million USD for married couples, due to a unified exclusion of the first $11.2 million or $22.4 million respectively from the taxable estate.¹⁷ These figures are

14 Estate, Inheritance, Gift, and related tax differences and definitions will be discussed in further depth, infra.

15Justia, Estate Tax. https://www.justia.com/tax/estate-tax/. Last retrieved May 19, 2019.

16 Id. (Although technically a progressive tax rate, due to the deduction only the top tax rate is effective.)

17 EY, Worldwide Estate and Inheritance Tax Guide (2018); I.R.C. §§ 2001-2210.

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11 current for 2019 and are indexed for inflation and subject to change each year.¹⁸ The estate tax is calculated on a tax inclusive basis, which means dollars used to pay the estate tax are subject to the estate tax.¹⁹ This is because the estate tax is paid out of the taxable estate after the estate tax has been applied to the entire estate.²⁰ The estate tax is levied on the fair market value of the decedent’s worldwide gross estate, less certain deductions.²¹ The estate tax code (Internal Revenue Code sections 2001-2210) in the United States is remarkably complex, and includes provisions that deem certain property that had been transferred prior to the decedents death as “retained” within their gross estate.²² Additionally, all property subject to estate taxation (including property otherwise excludable due to the unified deduction) receives a step- up in basis to fair market value on the date of the death of the decedent.²³ 3.2.1.2 Estate Taxation of Non-US Citizens

Non-US citizen residents are subject to the same estate tax rules.²⁴ Non-US citizen non-residents are subject to taxation based on certain assets with a situs within the United States, with the same estate rules, except that the exemption is only $60,000 per resident (only for transfers at death), and a progressive tax rate up to a top rate of 40%.²⁵ Non-US citizens may be liable for unlimited tax liability by virtue of their domicle within the United States at the time of a taxable event, or limited tax liability by property considered to have a situs within the United States at the time of death.²⁶ Residence or domicile is determined for estate and gift taxation purposes as

18 Id.

19 Id.

20 Id.

21 Id.

22 Id.

23 Id.

24 Id.

25 Id.

26 Id.

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12 being within the United States if the non-citizen lives within the United States and has no present intention of leaving.²⁷

3.2.1.3 Related Taxation Rules

The US has both a gift tax and a generational skipping transfer tax (“GSTT”), discussed in more depth below.²⁸

3.2.1.3.1 Gift Tax

The gift tax is progressive, but shares the unified deduction of $11.2 million, indexed for inflation with the estate tax.²⁹ Both the tax and the deduction are applicable to both US citizens (regardless of residence) as well as non-citizen residents.³⁰ All gifts between married US citizens or to a US citizen spouse are exempt from the gift tax; however gifts to a non-citizen spouse are limited to an annual transfer of $152,000, as adjusted for inflation.³¹ There is an annual exclusion of $15,000 for all other gifts.³² 3.2.1.3.2 GSTT

The United States GSTT applies to all transfers of property to someone two or more generations removed from the transferrer.³³ The purpose of the GSTT is to prevent wealthy persons from transferring property

27 Deloitte, ‘US Estate and Gift Tax Rules for Resident and Non-resident Aliens’ (2019), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-us-estate-and- gift-tax-rules-for-resident-and-nonresident-aliens.pdf (last retrieved June 6, 2019).

28 I.R.C. §§ 2501-2524

29 Worldwide Estate and Inheritance Tax Guide; I.R.C. §§ 2501-2524.

30 Id.

31 Id.

32 Id.

33 I.R.C. §§ 2601-2664

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13 to someone two or more generations removed, thereby avoiding estate tax exposure in the generation that is “skipped.”³⁴

The GST tax rate is currently 40%, as it is tied to the maximum estate tax rate.³⁵ There is a separate $11.2 million—indexed to inflation—lifetime exemption.³⁶

3.2.2 Denmark

3.2.2.1 Inheritance Taxation

Denmark has a succession tax that is structured as an inheritance taxation scheme.³⁷ In an inheritance tax regime, taxes are paid by the inheritor of the estate following receipt of the property, as opposed to an estate tax, which is paid by the estate itself prior to distribution to the beneficiaries.³⁸ This is based upon the total net value of assets passed on to other parties other than the spouse.³⁹ This tax applies to all worldwide assets off any person domiciled in Denmark at the time of death, or if domiciled outside Demark at the time of death, to only the assets with a Danish situs (permanent establishment within Denmark).⁴⁰

The inheritance tax is structured at a tax rate of 15% on the net value of the assets exceeding DKK289,000, as well as on additional tax of 25% on the assets of the estate passed to non-heirs.⁴¹ The 15% tax is deducted prior

34 Worldwide Estate and Inheritance Tax Guide at 380.

35 I.R.C. §§ 2641

36 I.R.C. §§ 2631–32

38 See, e.g., INHERITANCE TAX, Investopedia,

https://www.investopedia.com/terms/i/inheritancetax.asp (last retrieved June 6, 2019).

40 Id. at 88.

41 Id. at 86.

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14 to the application of the 25% tax, which results in a maximum tax burden of 36.25%.⁴²

There are no inheritance taxes imposed if the value of the estate is below DKK289,000, or if the estate is passed to a public utility or to the state.⁴³

3.2.2.2 Gift Taxation

Denmark has a gift tax that applies to any donor or recipient of a gift that is domiciled in Denmark.⁴⁴ The gift tax is structured as follows: 0%

between spouses, 15% between close relatives, 36.25 to stepparents or grandparents, and the ordinary progressive income tax rate of up to 52% on all other gifts.⁴⁵

Gifts under DKK64,300 per calendar year to children (including step- children), and their children, the surviving spouse of a deceased child, parents (including stepparents), grandparents, and certain other closely related parties are not subject to gift taxation. ⁴⁶ Gifts to spouses of living children under DKK22,500 per year are also not subject to gift taxation.⁴⁷

3.2.3 Finland

Finland has a succession tax structured as an inheritance tax which is applied to the individual shares of the beneficiaries of the estate rather than to the estate as a whole.⁴⁸ The inheritance tax applies to any property as long

42 Id.

43 Id. at 90.

44 Id. at 88.

45 Id. at 87.

46 Id. at 90.

47 Id.

48 Id at 94.

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15 as the deceased or beneficiary of said property is a resident in Finland at the time of death, as well as to real property with a situs in Finland and intangible personal property where 51% or more of the total gross assets related to the property is real property located within Finland.⁴⁹

The tax is applied at a progressive rate with two rates of taxation. The first is for spouses, direct heirs in an ascending or descending line, spouses’

direct heirs in a descending line and fiancé(e)s, adopted persons, foster children, and former spouses or non-married partners who have had children together.⁵⁰ This first-class rate is applied in a progressive rate based on the amount of the bequest, with rates ranging from 7% for the lowest bracket of

€20,000–€40,000, to 19% for bequests above €1,000,000.⁵¹ The second rate applies to all beneficiaries not mentioned above, and ranges from 19% for the lowest bracket of €20,000–€40,000, to 33% for bequests above

€1,000,000.

Finland’s gift tax scheme applies to any gift where the donor or beneficiary is a resident in Finland at the time the gift was made, to real property with a situs in Finland, and intangible personal property where 51%

or more of the total gross assets related to the property is real property located within Finland.⁵²

The gift tax is applied, like the inheritance tax, at a progressive rate with two rates of taxation. The first is for spouses, direct heirs in an ascending or descending line, spouses’ direct heirs in a descending line and fiancé(e)s, adopted persons, foster children, and former spouses or non-married partners

49 Id.

50 Id at 97.

51 Id.

52 Id at 94.

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16 who have had children together.⁵³ As with the inheritance tax, this first-class rate is applied in a progressive rate based on the amount of the bequest, with rates ranging from 7% for the lowest bracket of €20,000–€40,000, to 19%

for bequests above €1,000,000.⁵⁴ The second rate applies to all beneficiaries not mentioned above, and ranges from 19% for the lowest bracket of

€20,000–€40,000, to 33% for bequests above €1,000,000.⁵⁵ 3.2.4 Netherlands

The Netherlands succession tax is an inheritance tax which is applied to all worldwide assets of any decedent who was a resident or deemed to be a resident of the Netherlands at the time of death.⁵⁶ Dutch nationals are deemed to be a resident in the Netherlands for a period of ten years after moving their domicile outside of the Netherlands.⁵⁷ The tax applies to most acquisitions valued over €123,248.⁵⁸

The tax is a progressive rate split into three categories: partner and children, at a rate of 10% to 20%; grandchildren, at a rate of 18% to 36%;

and all other persons, at a rate of 30% to 40%.⁵⁹

There are various exemptions, including:

• those providing for complete exemption for property transferred to the state, a charity, or entities contributing to the social welfare of the community;

53 Id at 97.

54 Id.

55 Id.

56 Id. At 225.

57 Id. at 227.

58 Id.

59 Id.

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• exemptions of up to €643,194 to the surviving partner; an exemption of €61,106 for sick or disabled children;

• normal exemption for children and grandchildren: €20,371;

• exemption of €48,242 for parents;

• and standard exemption for all other parties of €2,147.⁶⁰

The Netherlands gift taxation scheme applies to the value of all gifts made by a resident or deemed resident of the Netherlands at the time of the gift. Dutch nationals are deemed as resident under the same provisions as for the inheritance tax.⁶¹ Persons who are not a national of the Netherlands but were a former resident will be deemed a resident for a period of one year following their departure. Spouses and unmarried partners are considered as one person for gift taxation purposes and are thus not subject to taxation on gifts.⁶²

The gift tax is the same as the inheritance tax and is a progressive rate split into the same three categories and rates as the inheritance tax: partner and children, at a rate of 10% to 20%; grandchildren, at a rate of 18% to 36%;

and all other persons, at a rate of 30% to 40%.⁶³

Important exemptions for the gift tax include:

• complete exemption of gifts from the state, a charity, or entities contributing to the social welfare of the community;

60 Id at 228.

61 Id. at 227.

62 Id at 226.

63 Id at 227.

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• one-time exemption of €25,731 for a gift to a child between the ages of 18 and 40, or €53,602 if the gift is used to fund an expensive education;

• exemption of €5,363 on gifts from parents to children; and

• an exemption of €2,147 of other gifts.⁶⁴

64 Id at 228.

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4. Bilateral Tax Treaties

4.1 Individual Bilateral Tax Treaties by Countries 4.1.1 United States – Denmark

The United States of America and Denmark concluded an estate and gift tax treaty signed April 27, 1983. The Treaty is titled as the “Convention Between the Government of The United States of America and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances, Gifts and Certain Other Transfers,” hereinafter referred to as the “Denmark Treaty.”⁶⁵

4.1.1.1 Scope

The Denmark Treaty applies to the following transfers, unless otherwise specified in the treaty:

a) transfers of estates of individuals whose domicile at their death was in one or both of the Contracting States;

b) gifts of donors whose domicile at the time of gift was in one or both of the Contracting States; and

c) generation-skipping transfers of deemed transferors whose

65 Convention Between the Government of the United States of America and the

Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances, Gifts and Certain Other Transfers, Signed 4/27/83.

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20 domicile at the time of deemed transfer was in one or both

of the Contracting States.⁶⁶ 4.1.1.2 Taxes Covered – Denmark

The Treaty applies to both the Estate and Gift Taxes levied in Denmark.⁶⁷

4.1.1.3 Taxes Covered – United States

The Treaty applies to the Estate, Gift, and Generation Skipping Transfer Taxes levied in the United States.⁶⁸

4.1.1.4 Method of Double Taxation Relief

Where Denmark imposes taxes on an individual based on the situs of real property within Denmark, related to a permanent establishment located within Denmark, or due to domicile within Denmark and the individual is either domiciled within the United States or a citizen of the United States and is therefore taxable under the United States Estate, Gift, or GSTT code, double taxation is avoided by the allowance of a credit by the United States equal to the tax paid to Denmark.⁶⁹ In the case of an individual domiciled within Denmark and taxable via citizenship by the United States, this credit only applies to taxes paid that are not taxed on the basis of situs of real property or permanent establishment within the United States.⁷⁰

Where the United States imposes taxes based on the situs of real property within the United States or related to a permanent establishment

66 Id.

67 Id.

68 Id.

69 Id. at 10.1

70 Id.

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21 located within the United States on an individual domiciled within Denmark, double taxation is avoided by the allowance of a credit by Denmark equal to the tax paid to the United States.⁷¹

Any tax imposed on the transfer of an estate by one state must include credit for any prior gift or GSTT tax paid to the other state deemed made by the decedent if said transfer of property is subject to succession or gift or GSTT taxes by the first state.⁷² However, credits allowed for transfers prior to death shall not reduce any credits given on taxes imposed at death.⁷³ 4.1.1.5 Determination of Fiscal Domicile

The treaty defines a person’s domicile for the purposes of the treaty as “in the United States if he is a resident or citizen thereof under United States law; and in Denmark, if he is a resident thereof under Danish law.⁷⁴” If by reason of the provisions above a person is found to be domiciled in both States, their status will be determined as follows:

First, in the State where he had a permanent home available, or if the person has a permanent home available in both States, in the state with the center of vital interests;

Second, if not resolved by the preceding, by habitual abode; and Finally, if still unresolved, by mutual agreement between the States.

Additionally, if a person, at the date of their death or at the time of transferring property subject to the above mentioned tax laws is: a citizen of

71 Id. at 10.2

72 Id. at 10.3

73 Id. at 10.4

74 Id. at 4.

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22 only one state; and deemed to be domiciled in both States, but only domiciled in the state they are not a resident for less than five years (in the aggregate) during the preceding even year period, shall be deemed to be only a resident of the state of which they are a citizen of.⁷⁵

4.1.2 United States – Finland

The United States of America and Finland concluded an estate and gift tax treaty signed March 3, 1952. The Treaty is titled as the “CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES,” hereinafter referred to as the

“Finland Treaty.”⁷⁶

4.1.2.1 Scope and Determination of Domicile or Residence

The treaty applies to any taxable event that results in taxation in both States under the taxes covered within the treaty.⁷⁷ Domicile or Residence under this Treaty shall be determined according to the laws in force in the appropriate respective country.⁷⁸

4.1.2.2 Taxes Covered – Finland

The treaty applies only to the inheritance tax and “any other taxes of a substantially similar character”.⁷⁹

75 Id.

76 CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES, signed March 3, 1952.

77 Id.

78 Id. at Art. III(1).

79 Id. at Art. I(1)-(2).

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23 4.1.2.3 Taxes Covered – United States

The treaty applies only to the Federal estate tax and “any other taxes of a substantially similar character.”⁸⁰

4.1.2.4 Method of Elimination of Double Taxation

The Finland Treaty allows for both an exemption and credit method of relief from double taxation.⁸¹

The exemption applies in three situations: first, when the United States imposes estate tax liability on a decedent who was a resident of Finland at the time of death (and not a citizen nor domiciled in the United States);

second, when Finland imposes succession tax liability on a decedent who was a citizen of or domiciled within the United States but not a Finnish resident; and third, when a beneficiary of a decedent who was a citizen of or domiciled within the United States, as long as the beneficiary is not a resident of Finland at the time of the decedent’s death.⁸²

Where the exemption applies, it is calculated as a proportionate allowance, equal to an amount at least as much as the proportion of the value of the property being taxed bears to the value of the total property that would have been taxable if the decedent or beneficiary, as the case may be, had been a resident of the other state for tax purposes.⁸³ This exemption only applies

80 Id.

81 Id. at Art. IV and V.

82 Id. at Art. IV.

83 Id. “a specific exemption . . . in an amount not less than the proportion thereof which the value of the property subjected to its tax bears to the value of the property which would have been subjected to its tax if such decedent or beneficiary had been resident in [the other state].”

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24 if it would have been allowable under its law if the decedent or beneficiary was a resident of the same state imposing the tax.⁸⁴ Put another way, this allows for the usage of each state’s potential exemptions by non-citizens or non-residents from the estate tax imposed by that state, calculated using a proportional formula.

To illustrate how this exemption might work, consider the case of a Finnish decedent, who is not a resident or citizen of the United States, but is liable on the basis of estate tax due to the deemed situs of property within the United States. This proportional allowance allows the Finnish estate to calculate the value of the property actually taxable by the United States, then calculate the total value of all property that would be taxable if the Finnish decedent was rather a United States domiciliary. The estate of the Finnish decedent would then be able to take an exemption from the tax imposed by the United States in the proportion of the value of the property actually taxable to the property hypothetically taxable if they were domiciled within the United States. However, this is subject to a further limitation that it must be a deduction that would have been allowable if the decedent had been domiciled within the United States. In the case of this specific example, this would allow for a deduction of up to USD$11.2 million, the maximum deduction allowable for a non-US citizen resident in 2019.⁸⁵

The tax credit applies in three situations. The first is when a decedent is domiciled in or a citizen of the United States and a tax is imposed in Finland with respect to property situated in Finland and included in the taxable estate of both States, the United States will allow a credit for the

84 Id. “Shall allow a specific exemption, which would be allowable under its law if the decedent or beneficiary, as the case may be, had been resident in [the same state].”

85 See 3.2.1, Supra.

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25 amount of tax imposed in Finland, not to exceed the amount of tax imposed by the United States in respect to the same property.⁸⁶

The second situation is when the decedent or beneficiary of an estate is a resident of Finland at the time of death of the decedent and a tax is imposed in the United States with respect to property situated in the United States and included in the taxable estate of both States, Finland will allow a credit for the amount of tax imposed in the United States, not to exceed the amount of tax imposed by Finland in respect to the same property.⁸⁷

The third situation supersedes the credit available in the first and second situations and applies when there is property includable for taxation in both States and is deemed to be situated either in both States, or outside of both States.⁸⁸ In this situation, each state shall allow a credit against their taxes imposed, in the amount of the taxes imposed by the state imposing the lesser amount of taxes, divided between the two States in proportion to the amount of taxes imposed in each State in regard to the property.⁸⁹

4.1.2.5 Determination of Situs

When tax liability is to be imposed on the basis of situs of property under this treaty, the situs of the property will be determined as follows:

immovable property and tangible movable property shall be deemed situated at the location of the property at death. Debts shall be situated where the debtor resides. Shares or stock are situation at the place where the corporation was created or organized. Intangible property will be situated at the place they are registered, used, or the place where the rights arising therefrom are

86 Finland Treaty at Art. V(1)

87 Id. at Art. V(2).

88 Id. at Art. V(3).

89 Id.

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26 exercisable. Ships and aircraft are situated at the place of registration or documentation. All other property will be situated in accordance with the laws of the State imposing the tax on the basis of the property’s situs within the state, unless neither state imposes the tax based on situs, then the property shall have the situs of the domicile of the deceased person at the time of death.⁹⁰

4.1.3 United States – Netherlands

The United States of America and the Kingdom of the Netherlands concluded an estate and gift tax treaty signed July 15, 1969. The Treaty is titled as the “CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES,” hereinafter referred to as the “Dutch Treaty.”⁹¹

The Dutch Treaty contains unusual provisions for elimination of double taxation due to the issue of both the United States and the Netherlands taxing on the basis of nationality.⁹²

4.1.3.1 Scope

The Treaty applies to estates of decedents who are subject to taxation in one or both States due to the decedent’s domicile within or citizenship

90 Id. at Art. III(2).

91 CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES, Signed July 15, 1969.

92 Taxes are substantially imposed on the basis of nationality in the Netherlands for a period of ten years after a Dutch national changes domicile, or one year for a non-national who had been domiciled within the Netherlands. See 3.4.2.1, Supra.

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27 thereof at death.⁹³ A United States permanent resident who is not domiciled within the United States at death shall be considered neither a citizen nor resident of the United States for the purposes of this treaty.⁹⁴

The Dutch Treaty allows for governments to impose liability both on the basis of domicile at death—except in the case of immovable property, business property relating to a permanent establishment, and fixed bases used for professional services—as well as citizenship at the time of death.⁹⁵ Immovable property, business property relating to a permanent establishment, and fixed bases used for professional services may be taxed based on the situs of the property.⁹⁶

4.1.3.2 Taxes Covered – Netherlands

The Treaty applies to both the inheritance duty and the transfer duty at death.⁹⁷

4.1.3.3 Taxes Covered – United States

This Treaty applies to the Federal Estate Tax only.⁹⁸ 4.1.3.4 Elimination of Double Taxation

The Dutch Treaty uses a credit method to provide relief from double taxation.⁹⁹ There is a cap on the total amount of credit allowed capping the

93 Id. at Art. 1.

94 Id.

95 The exception for business property of a permanent establishment also includes a fixed place of business used for professional services, as well as several exceptions and guidance for interpretation. See Id. at Art. 6 and 7.

96 Id. at Art. 6-9.

97 Id. at Art. 2(1)(b).

98 Id. at Art. 2(1)(a).

99 Id. at Art 11.

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28 credit at a maximum of the amount of tax attributable to the property in respect to which credits are allowable.¹⁰⁰

When taxes are imposed by one State based on the situs of immovable property, business property relating to a permanent establishment, or fixed bases used for professional services, and also imposed by the other State on the basis of domicile or citizenship of the decedent, the State imposing tax based on domicile or citizenship shall allow a credit equal to the amount of tax imposed by the other state.¹⁰¹

When taxes are imposed by both States not on the basis of situs of immovable property, business property relating to a permanent establishment, or fixed bases used for professional services, relief from double taxation is accomplished in one of three ways: first, if the decedent was a citizen of one state at the time of death, and had been domiciled in the other state for 7 or more years, in the aggregate, during the 10 year period ending in their death, then the state of citizenship will allow a credit equal to the amount of tax imposed by the state of their domicile.¹⁰² Second, if the decedent is a citizen of both States but domiciled in only one, the state of which the decedent is non domiciled will allow a credit equal to the amount of tax imposed by the state of their domicile.¹⁰³

The final circumstance is unique, and the credit cap does not apply in this case.¹⁰⁴ If neither of the previous two situations apply, but both States are

100 Id. at Art. 11(2)(c) and 11(3).

101 Id. at Art. 11(1).

102 Id. at Art. 11(2)(a).

103 Id. at Art. 11(2)(b).

104 “[When a] credit is allowable under paragraph (1) or (2) (a) or (b) [it] shall not exceed that part of the tax of the crediting State which is attributable to such property.” Id. at Art.

11(3).

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29 imposing a tax, then a proportional tax credit shall be allowed by both States and calculated as follows: both States shall calculate the tax attributable to the property with which both States are imposing tax liability. Take the proportion of the lower of the two amounts to the sum of both amounts, and both States shall allow a credit of that proportion to the total amount of tax being on said property by the respective state.¹⁰⁵

To illustrate, take a situation where the Netherlands is imposing a tax liability of 10 on the property of the decedent at issue, and the United States is imposing a tax liability of 20 on the property at issue. To calculate the credit, one would take the smaller tax liability–10—and divide it by the sum of both liabilities—30. This results in a proportional credit of 10/30, or 1/3.

This would result in a credit of 3.333̅̅̅̅ for the Netherlands, and a credit of 6.666̅̅̅̅ for the United States. This formula ensures that no tax payer will ever pay a higher tax rate in aggregate than the higher of the two tax rates imposed by the States.

4.1.3.5 Determination of Fiscal Domicile

Determination of domicile of decedent is determined by following a hierarchical list: first, domicile shall be determined by the law of the State in which he is considered domiciled within.¹⁰⁶ Second, if the decedent would be considered as being domiciled in both States, but a citizen of only one, they shall be considered to be domiciled within the state they were considered a citizen of, but only if the following applies: they had been domiciled in the other state for less than 7 years (in aggregate) of the 10 years preceding death,

105 “Each State shall allow a credit in the amount which bears the same proportion to the amount of its tax attributable to such property, or to the amount of the other State's tax attributable to the same property, whichever is less, as the former amount bears to the sum of both amounts.” Id. at Art. 11(c).

106 Id. at Art. 4(1).

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30 and they had been in the other state for “ business, professional, educational, training, tourism, or a similar purpose (or in his capacity as the spouse or a dependent member of the family of a person who was in that other State for such a purpose)” and had no clear intention to remain indefinitely within that other state.¹⁰⁷ Finally, when the decedent would be considered as domiciled within both States, and the preceding rules do not resolve the issue, domicile shall be determined by following hierarchical list: first, the state in which the decedent made their permanent home for five or more years prior to death;

second, the State with which their personal relations are closest; third, the State of citizenship; and finally, by mutual agreement.¹⁰⁸

4.1.3.6 Exemptions

The Treaty provides for certain exemptions from taxation. The first involves any non-community property which is passed from a United States citizen or domiciled decedent to a surviving spouse, which is taxable in the Netherlands by virtue of it being immovable property, business property relating to a permanent establishment, or fixed bases used for professional services with a Dutch situs.¹⁰⁹ In this case, any property taxable by the Netherlands under these conditions is taxable only to the extent that the value of said property exceeds 50% of the value of the entirety of the property taxable in the Netherlands.¹¹⁰

107 Id. at Art. 4(2). There is a presumption that the decedent did not have a clear intention to remain indefinitely unless there is clear and convincing evidence to the contrary. Art.

4(4).

108 Id. at Art. 4(3).

109 Id. at Art. 10(1).

110 Id. There is, however, an exception to this rule: it “shall be inapplicable during such period as the laws of the United States make the tax imposed by it with respect to estates of nonresident aliens substantially less favorable in relation to the tax imposed by it with respect to estates of its citizens or domiciliaries than is the case when this Convention is signed.” Art. 10(3). This exception is outside of the scope of the Thesis, however.

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31 The second situation is when property is taxable by a State solely on the basis of situs of immovable property, business property relating to a permanent establishment, or fixed bases used for professional services. In this case, tax may only be imposed if the property has a value of over $30,000, after any deductions. The tax imposed on the amount over $30,000 must be taxed at rate not to exceed 50%.¹¹¹

4.1.4 OECD Model Treaty

The OECD has promulgated a model treaty for avoidances of double taxation on succession taxation, first as the 1966 OECD Draft Double Taxation Convention on Estates and Inheritances and updated as the 1982 Model Double Taxation Convention on Estates and Inheritances and on Gifts.

The Denmark and Netherlands treaties appear to be either heavily modified versions of the OECD model treaty or heavily influenced by the treaties. The OECD model takes much of the same structural approach as the above- mentioned treaties, with taxation primarily determined by domicile, with the exception of immovable property and property connected to a permanent establishment or fixed base being taxed based on situs.¹¹² The model convention allows for either an exemption or credit method, similar to the OECD Model Tax Convention.¹¹³ The rules for determination of fiscal domicile and computation are notably less complex than the rules in the Denmark or Netherlands Treaties. The 1982 publication includes a commentary on the model convention to assist in interpretation of the provisions.¹¹⁴

111 Id. at Art. 10(2).

112 See 1982 Model Double Taxation Convention on Estates and Inheritances and on Gifts.

113 See, generally, OECD Model Tax Convention.

114 1982 Model Double Taxation Convention on Estates and Inheritances and on Gifts.

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32

5. Unilateral Double Taxation Elimination Provisions

5.1 Denmark

There are no unilateral rules for elimination of double taxation in relation to succession taxes in Denmark.

5.2 Finland

Finland provides for unilateral double taxation relief in certain situations. When a beneficiary receives any property where the decedent or beneficiary was a Finnish resident at the time of death, or when the inheritance is of real property situation in Finland, and the taxpayer is a Finnish resident, a credit is allowed against the inheritance due in Finland on the same property.¹¹⁵ The credit is equal to the lessor of either: the amount of foreign succession tax owed on the property, or an ordinary credit based on the following calculation: the amount of Finnish inheritance tax owed on the value of the foreign property divided by the value of the total property including foreign property inherited.¹¹⁶

5.3 Netherlands

The Netherlands apply Dutch unilateral law for the avoidance of double taxation when no tax treaty applies to double taxation on succession taxes.¹¹⁷

5.4 United States

There are no unilateral rules for elimination of double taxation in relation to succession taxes in the United States.

115 Worldwide Estate and Inheritance Guide, at 95.

116 Id.

117 Id. at 233.

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33

6. Comparison and Analysis of the Selected Treaties

When viewing the Treaties, some general commonalities can be determined. United States bilateral succession taxation treaties can be broadly split into two categories: those which determine which State has the priority to tax property based primarily on the situs of the property, whether by exemption or credit; and those which determine which state has the priority to tax based primarily on the domicile of the decedent or beneficiary of the decedent.¹¹⁸ The Finland treaty would fall into the situs category, while the Denmark and Netherlands treaties¹¹⁹ and the OECD Model Convention fall into the domicile category.

6.1 Advantages and Disadvantages of Situs and Domicile Type Treaties

Both the Situs and Domicile treaty types have positive and negative attributes. The Finnish treaty requires a complex analysis of potentially all property in an estate with cross boarder implications, as all property must have a determination of situs made, and credits and exemptions to be made for and between each country. Such an investigation and determination could be quite expensive and time consuming and providing proof to the taxing authorities would likely be similarly burdensome. Additionally, this type of treaty may allow for tax planning opportunities for a creative tax lawyer to structure the situs of property in a tax advantageous manner by moving property subject to succession taxation to the most tax advantageous location prior to the death of the eventual decedent.

118 See BNA Portfolio 6896-1st: U.S. Estate and Gift Tax Treaties, Detailed Analysis, I.

Introduction, discussing United States bilateral succession tax treaties and detailing the two broad categories in which the bilateral treaties may fit into.

119 See BNA Portfolio 6896-1^st, categorizing US bilateral succession tax treaties into Situs and Domicile rule treaties.

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34 The Domicile type treaties, such as the Denmark and Netherland treaties offer a simplicity of analysis as the determination of situs for most property types is not necessary prior to allocation of credits or exemptions, and determination of domicile, while still necessary prior to allocation, is generally a much simpler analysis as it involves only the analysis of a single party rather than the entirety of the property of an estate. This simplicity could lead to decreased legal and investigative costs in the administration of the estate, but the limited situs rules mean that countries could potentially miss out on taxation of certain assets that governments would traditionally wish to protect, such as corporate stock and intangible property such as trademarks, intellectual property, and copyrights. However, this possibility may be mitigated by domestic taxation laws such as taxation of dividends and distributions, or other international treaties between the States regarding intangible property. Domicile type treaties significantly limit the potential of creative tax planning, as physically moving to avail oneself of advantageous tax laws is likely a much more invasive and undesirable proposition, especially for a person approaching the age where succession planning becomes a more pressing concern. Nonetheless, there may be some opportunities for creative tax planning, as the Domicile treaties discussed in this Thesis allow for situs taxation of certain property, including immovable (real) property. There is a potential for liquid assets to be used—or assets to be made liquid—and invested into immovable property (e.g., real estate) in the jurisdiction with succession tax laws that are more tax advantageous.

6.2 Where Double Taxation May Occur

The treaties discussed can also be differentiated based on the scope of tax law covered by the individual treaties. Two treaties—the Finnish and Dutch treaties—cover only estate and inheritance taxes, and do not contemplate gift taxation issues. The lack of inclusion of the gift tax into the

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35 treaty could lead to major issues of exposure to double taxation for certain individuals. First, and most obvious, as the United States imposes unlimited tax liability based on nationality, when a United States citizen is a resident of either Finland or Denmark and gives a gift over the annual exclusion of

$15,000 per recipient in the United States, and above the lowest gift taxation bracket of € 20,000 per beneficiary in Finland or above the applicable exemption in the Netherlands,¹²⁰ they may be subject to a double tax liability.

In regard to the treaty between the United States and Finland, there are several additional situations where double taxation could arise: first, as Finland applies gift tax on beneficiaries as well as donors, any time a United States citizen with residence any country or a United States resident makes a gift to a Finnish beneficiary above both applicable exclusions, double taxation may arise.¹²¹ Next, an issue of double taxation may arise when a United States citizen or resident makes a gift of real property with a situs in Finland or intangible personal property where 51% or more of the total gross assets related to the property is real property located within Finland to a beneficiary located outside Finland.¹²² Finally, a Finnish resident gifting property with a United States situs may subject the gift to double taxation.¹²³

In regard to the treaty between the United States and the Netherlands, there is an even greater risk of double taxation of gifts, as not only does the United States tax on the basis of citizenship regardless of domicile, the Netherlands deem a citizen as resident of the Netherlands for ten years following their emigration from the Netherlands to a new domicile,¹²⁴ which

120 See 3.2.4.2, Supra.

121 See 3.2.3.2, Supra.

122 See 3.2.3.2, Supra.

123 See 3.2.1.2 and 3.2.1.3, Supra.

124 See 3.2.4.1, Supra.

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36 has the function of subjecting certain Dutch nationals to what amounts to taxation on the basis of citizenship regardless of domicile. As well as the issue of double taxation that may arise with gift from a United States Citizen resident in Netherlands, an issue of double taxation may also arise when a Netherlands citizen within 10 years of emigration is a resident in the United States and makes a gift over both applicable thresholds. As the Netherlands also deems a non-national as a resident for one year after departure,¹²⁵ a United States citizen who moves to any jurisdiction or any national who moves from the Netherlands to the United States may be subject to double taxation on any gifts above the applicable thresholds for one year after departure. Finally, there is a risk of double taxation when a Netherlands resident or deemed resident makes a gift of certain property with a United States situs.¹²⁶

125 See 3.2.4.2, Supra.

126 See generally, footnote 26, Supra.

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37 7.

Conclusion

The most recent of the treaties examined was signed in 1983, with no subsequent updates for any of the treaties. There are significant potential issues of double taxation in two of the treaties examined, so there is a clear need for subsequent analysis of other succession tax treaties, and possibly the need for updated treaties to be pursued. One potential reason that these treaties have not been subsequently updated is that these tax issues frequently affect only the very wealthy, and so infrequently give rise to an issue of double taxation. Another possibility that arises is that issues of double taxation may be dealt with by mutual agreement between the countries, especially as the parties affected are likely wealthy enough to litigate these issues. This is an area that is ripe with possibilities for further research and scholarship.

Whenever a succession tax treaty is concluded between two States, there will always be unique issues, potential loopholes, and political questions, so every treaty will necessarily be different. However, there are clear advantages to structuring these treaties in certain ways, and lessons to be learned for the future. First, tax treaties based on domicile are preferable, not only due to lowered costs of compliance, but also due to the lowered risk of tax evasion and tax base erosion due to creative tax planning. Second, it is clear from our analysis that a combined estate/inheritance taxation and gift taxation treaty is necessary, particularly where one of the contracting States taxes based on nationality or situs of property. Finally, there is clearly space for clever drafting in these treaties, such as the catchall provision in the Dutch treaty that ensures no party will ever pay more than the higher of the two tax rates when a risk of double taxation arises between the contracting States.

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38

8. Bibliography

By Order of Citation:

INHERITANCE TAX, ENCYCLOPAEDIA BRITANNICA.

Alan Cole, ‘Estate and Inheritance Taxes around the World,’ Tax Foundation (available at

https://files.taxfoundation.org/legacy/docs/TaxFoundation_FF458.pdf).

Internal Revenue Service, Estate & Gift Tax Treaties (International) https://www.irs.gov/businesses/small-businesses-self-employed/estate-gift- tax-treaties-international (last retrieved on June 6, 2019).

EY, Worldwide Estate and Inheritance Tax Guide (2018)

https://www.ey.com/gl/en/services/tax/worldwide-estate-and-inheritancetax-guide---country-list (last retrieved on June 5, 2019).

[ No. 2595 (Dec. 18, 1952).

Mark Van Hoecke, 'Methodology of Comparative Legal Research', LaM december 2015, DOI: 10.5553/REM/.000010.

TAX, Black's Law Dictionary (10th ed. 2014) Internal Revenue Service, Estate Tax.

https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

I.R.C. §§ 2001-2210, 2501-2524, 2601-2664.

Justia, Estate Tax. https://www.justia.com/tax/estate-tax/

Deloitte, ‘US Estate and Gift Tax Rules for Resident and Non-resident Aliens’ (2019),

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax- us-estate-and-gift-tax-rules-for-resident-and-nonresident-aliens.pdf (last retrieved June 6, 2019).

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39 INHERITANCE TAX, Investopedia,

https://www.investopedia.com/terms/i/inheritancetax.asp (last retrieved June 6, 2019).

Convention Between the Government of the United States of America and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances, Gifts and Certain Other Transfers, Signed 4/27/83.

CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF FINLAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES, signed March 3, 1952.

CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE KINGDOM OF THE NETHERLANDS FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON ESTATES AND INHERITANCES, Signed July 15, 1969.

1982 OECD Model Double Taxation Convention on Estates and Inheritances and on Gifts.

OECD Model Tax Convention.

BNA Portfolio 6896-1st: U.S. Estate and Gift Tax Treaties, Detailed Analysis.