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Exemption from inheritance and gift tax to also provisionally apply to donations to municipal voters' associations
Press Release No. 61/2008 of 04 June 2008
Order of 17 April 2008
2 BvL 4/05
§ 13.1 no. 18 of the Inheritance and Gift Tax Act (Erbschaftsteuer- und Schenkungsteuergesetz - ErbStG) violates the right to equality of opportunity in so far as donations to political parties are tax exempt but donations to municipal voters' associations and their umbrella organisations are not. There are no tenable reasons under constitutional law to justify the distinction being made. Despite § 13.1 no. 18 ErbStG being incompatible with the Basic Law (Grundgesetz - GG), it is necessary, however, by way of exception to order that this provision continue to apply until the legislature has amended the law and to extend the tax exemption to include municipal voters' associations and their umbrella organisations. The Second Senate of the Federal Constitutional Court reached this decision based on a submission by the Finance Court of Hesse (Hessisches Finanzgericht). The decision also gave occasion to clarify the admissibility requirements for judicial referrals concerning tax exemptions, tax relief and other tax benefits.
The Financial Court's decision to make a submission was based on the case of a municipal voters' association which refused to pay gift tax amounting to DM 400 after receiving a donation of DM 5,000.
In essence, the decision is based on the following considerations:
I. § 13.1 no. 18 ErbStG is relevant to the decision in the case before the Finance Court of Hesse, since the outcome of the case is dependent on the validity of the provision.
Where a court obtains a decision from the Federal Constitutional Court in accordance with Article 100.1 GG because it is convinced of the unconstitutionality of a statutory tax provision which benefits only certain persons or groups, the assumption must be made that the provision is of relevance to the outcome of the original proceedings, so long as the legislature is not prevented on legal grounds or manifest grounds in fact from establishing a provision which favours the plaintiff in the original proceedings. Accordingly, the conditions for a submission to the Federal Constitutional Court are met in the present case. The legislature is prevented neither on legal grounds nor on other grounds from exempting municipal voters' associations and their umbrella organisations from inheritance and gift tax in the same way as political parties.
II. Treating political parties and municipal voters' associations differently on account of § 13.1 no. 18 ErbStG alters the competitive situation between political parties and municipal voters' associations in a manner which is of serious consequence.
On account of the tax exemption under § 13.1 no. 18 ErbStG, political parties are able to utilise the full amount of their donations for their political work. The funds available to voters' associations to finance their political work in the municipalities are, by contrast, reduced by the amount of the inheritance and gift tax they are liable to pay. Donations in excess of the tax-free allowance (currently EUR 5,200) are usually taxed at a rate of 17 per cent. In addition, donations from one donor received within a period of 10 years are added together. As a result, regular annual donations of a little more than EUR 500 are liable to tax.
§ 30 ErbStG is also of relevance as regards the restriction of competition. According to this provision, the tax authorities must be notified both by the beneficiary as well as by the donor of each acquisition which is subject to inheritance tax. Whilst the predominant opinion in the literature is that no duty of notification exists when it comes to donations to political parties, that duty does apply to donations made to voters' associations. The duty of notification also applies where it is possible that, when added together over a period of 10 years, the donations might exceed the tax-free allowance. This gives rise to a not inconsiderable amount of administrative effort.
A restraint of competition results from the fact that the donor is at least subsidiarily liable for any gift tax that may be payable and that the duty of notification also extends to those donors who donate moderate amounts to municipal voters' associations over a period of several years. In that respect one must also bear in mind that the amount of the donations made to voters' associations is considerably lower than is the case for political parties.
III. There are no tenable reasons under constitutional law for differentiating between political parties on the one hand and municipal voters' associations and their umbrella associations on the other. The different tasks, areas of activity and financial requirements of parties and municipal voters' associations do not justify their being treated differently for tax purposes.
Different treatment would only be justified if it were possible to establish that political parties have specific financial requirements which are not covered by other statutory regulations on funding and if the objective of the provision set out in § 13.1 no. 18 ErbStG was to compensate for these special financial requirements. This is, however, not the case. The special additional funding required by political parties on account of their tasks is not covered by exempting donations and other contributions under the law on inheritance and gift tax, but rather as part of state party financing.
Also, the objective of the tax exemption under § 13.1 no. 18 ErbStG is not to compensate the special additional financial burdens which result from the supra-local activities of political parties. The provision exempts generous donations to parties from inheritance and gift tax irrespective of whether the money is required or used for supra-local tasks. The tax benefit afforded political parties neither ties in to specific financial burdens on account of their supra-regional tasks, nor is a link recognisable or intended between the amount of the possible expenses and the amount of the tax saved.
Likewise, the special obligations imposed on political parties as regards the origin and utilisation of their funds and assets do not justify their being treated differently. It is neither recognisable that the lack of corresponding regulations applying to municipal voters' associations has led to considerable financial advantages, nor is the objective of § 13.1 no. 18 ErbStG to compensate for the different obligations as regards the rendering of accounts.
IV. Despite the incompatibility of § 13.1 no. 18 ErbStG with the Basic Law, it is necessary, by way of exception, to order that the provision continue to apply for a transitional period and to extend the tax exemption to include voters' associations. Were it no longer possible to apply § 13.1 no. 18 ErbStG - as a consequence of its being declared incompatible with the Basic Law - this would lead to considerable disadvantages for political parties, which have up until now been favoured. This would be disproportionate given the fact that it is not to be expected that the tax exemption for political parties will be abolished. Another argument in favour of extending the provision to cover municipal voters' associations and their umbrella associations for a transitional period is that the shortfall in tax revenue will probably not be very large.