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Submission by the Federal Finance Court on the question of the taxation of life annuities is inadmissible
Press Release No. 118/2009 of 15 October 2009
Order of 22 September 2009
2 BvL 3/02
Since 1992, the Federal Finance Court (Bundesfinanzhof) has regarded as a lump-sum portion of interest on capital the interest portion of an annuity which is paid as a counter-performance for a redistribution of assets that does not ensure the parties' livelihood. According to this case-law, the person obliged to pay the annuity was not able to deduct the interest portion as a special expense pursuant to § 10.1 no 1a sentence 2 of the Income Tax Act (Einkommensteuergesetz - EStG) because deducting interest on private debts was impermissible.
The plaintiffs of the initial proceedings, who are jointly assessed for income tax, have been married since 1992. In 1990, the husband had transferred his property with a single-family home on it to his later wife. She undertook to pay her husband a value-guaranteed life annuity on a monthly basis. The Tax Office regarded the interest portion of the annuity as income of the husband pursuant to § 22 no. 1 sentence 3 letter a EStG. Invoking the Federal Finance Court's case-law, the Tax Office denied the deduction of special expenses pursuant to § 10 Abs. 1 no. 1a EStG for the interest portion, which was in turn sought by the wife. The appeals lodged against this were unsuccessful. The Cologne Finance Court granted the relief sought in the actions brought against this decision because it took the view that contrary to the Federal Finance Court's case-law, the complainant should be granted the deduction sought of special expenses pursuant to § 10.1 no. 1a EStG. In the appeal proceedings on points of law, the Tenth Senate of the Federal Finance Court submitted to the Federal Constitutional Court the question of whether the taxation at their full nominal value - without taking into account a tax allowance for savers - of interest portions of income from life annuities pursuant to § 22 no.1 sentence 3 letter a EStG which are a counter-performance for the acquisition of assets from private property is compatible with the general principle of equality (Article 3. 1 of the Basic Law (Grundgesetz - GG)) notwithstanding the fact that they are lump-sum investment income.
The Second Senate of the Federal Constitutional Court has held that the submission by the Federal Finance Court is inadmissible because it falls short of the constitutional requirements placed on the substantiation of the relevance of the question submitted to the decision in the initial proceedings. As regards the assessment of the relevance to the decision (which concerns, in the instant case, the question of the denial of the deduction of special expenses), it does not suffice, in particular, for the Federal Finance Court to merely make reference to its own case-law. What is instead required for the submission to be admissible is that the court should deal in detail with the legal situation, that in doing so, it should take the legal views into account which have been developed in the legal literature and in case-law, and that it should take account of different results of interpretation.
In essence, the decision is based on the following considerations:
The Federal Finance Court has not complied with these constitutional requirements. As the Federal Finance Court rightly states, the question of whether the general principle of equality pursuant to Article 3.1 GG constitutionally requires to extend the tax allowance for savers pursuant to § 20.4 EStG to the taxation of life annuities pursuant to § 22 no. 1 sentence 3 letter a EStG, can only be relevant to the decision if the claim to the grant of a deduction for special expenses under § 10.1 no. 1a EStG is to be denied. If on the contrary the relief sought, by which the Federal Finance Court is bound also as regards its amount, had to be granted, it would be out of the question for procedural reasons alone to extend the tax allowance for savers to the plaintiff's income from the annuity, for a further reduction of the tax by extending the tax allowance for savers pursuant to § 20.4 sentence 3 EStG would be ruled out because this would go beyond the relief sought. In such a situation, it is not sufficient if the Federal Finance Court merely makes reference to its own case-law to substantiate its view that the action is to be rejected as unfounded to this extent, and if in this context it does not go into the arguments provided by legal literature and case-law that argue against the legality and constitutionality of its own case-law concerning the denial of the deduction of special expenses for the interest portion of life annuities.
The Federal Finance Court has also not sufficiently considered the possibility of an interpretation in conformity with the constitution of the provision that it submitted for review, even though such a solution stands to reason. The Federal Finance Court's view that equal facts are treated unequally here is based on the premise, which the court itself established, that under material law, the interest portion of the life annuity is a portion of interest on capital. As can be inferred from the reasoning of the reform of the taxation of life annuities by the Law on the Reform of Taxes (Gesetz zur Neuordnung von Steuern), the legislature did not proceed on this assumption. In its submission order, the Federal Finance Court took note of these statements but disregarded them as it considered them inapplicable. In this respect, it does not need to be decided to what extent the precept of interpretation in conformity with the constitution generally allows the judge to restrict or to complement the legislative intent. On no account, however, may an interpretation in conformity with the constitution miss or distort an essential aspect of the legislative objective.
The interpretation of the provision which does not follow the legislative intent does not, at any rate, release the Federal Finance Court from dealing with the question of whether the interest portion of the life annuity, which according to its own case-law is to be regarded under substantive law as a portion of interest on capital can in an interpretation in conformity with the constitution be subsumed under the constituent element of taxation set out in § 20 EStG, which would have the consequence that the tax allowance for savers under § 20.4 EStG would have to be granted by virtue of law; this would dispose of the question submitted. In this respect, the brief statement by the court is not sufficient in which it holds that an interpretation in conformity with the constitution that would take account of the considerations concerning the principle of equality under Article 3.1 GG is not possible in view of the unmistakeable assignment of such income to § 22 EStG on the one hand and the clear wording of § 20.4 sentence 1 EStG on the other hand.
Finally, the submission order lacks a sufficient discussion of the question of whether a reason that is viable under the law on equality exists for the unequal treatment of the taxation of life annuities as against the taxation of income from interest on capital. Above all, the submitting court did not deal with the aspect that the life annuity concerns a redistribution of assets and that the asset formation of the beneficiary from the life immunity is already completed so that the incentive effect of the tax allowance for savers, which is intended to set in precisely in the period of saving up, cannot come into effect any longer. It has also not been discussed whether the reasons for the different taxation of life annuities and interest on capital which have been stated in the legislative procedure would be suitable to justify an unequal treatment regarding the tax allowance for savers.