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Auxiliary basis of assessment in the law of property transfer tax incompatible with the Basic Law
Press Release No. 55/2015 of 17 July 2015
Order of 23 June 2015
1 BvL 13/11, 1 BvL 14/11
In an order published today, the First Senate of the Federal Constitutional Court held that the auxiliary basis of assessment (Ersatzbemessungsgrundlage) provided for in the law of property transfer tax is incompatible with the principle of equality (Art. 3 sec. 1 of the Basic Law [Grundgesetz – GG]). If the legislature chooses to use auxiliary bases of assessment it must – in order to satisfy the requirements of the principle of equal burdens – ensure that they lead to results that come more or less close to those of the regular basis of assessment (Regelbemessungsgrundlage). However, the auxiliary basis of assessment provided for in § 8 sec. 2 of the Property Transfer Tax Act (Grunderwerbsteuergesetz – GrEStG), which refers to the Act on Valuation (Bewertungsgesetz – BewG), leads to considerable and unjustifiable discrimination compared to the regular standard of assessment, which is based on the performance exchanged for the property in question. The legislature is required to pass new legislation, retroactively effective 1 January 2009, by 30 June 2016. The challenged provision shall apply until 31 December 2008.
Facts of the Case and Procedural History:
Under § 8 sec. 1 GrEStG, the regular basis of assessment for property transfer tax is the performance exchanged for the property in question, particularly the price paid by the buyer. The auxiliary basis of assessment enshrined in § 8 sec. 2 GrEStG applies if nothing is received in exchange for the property, in cases of transfers on the basis of a company’s articles of association as well as in cases in which at least 95 percent of a company’s shares are transferred. In such cases, it is §§ 138 et seq. BewG that determine the amount of property transfer tax owed.
The plaintiff of the initial proceedings in 1 BvL 13/11 is a corporation under US law. On 26 April 2001, it purchased a limited liability company (Gesellschaft mit beschränkter Haftung – GmbH) and a civil law association (Gesellschaft bürgerlichen Rechts) whose corporate assets included several plots of real estate including undeveloped and developed plots as well as plots used for agricultural and forestry purposes. The plaintiff of the initial proceedings in 1 BvL 14/11 is a GmbH. On 18 December 2002, it purchased from its only shareholder, a joint-stock company (Aktiengesellschaft), the single share in another GmbH, which owned an undeveloped and a developed plot of real estate. The objections raised by the plaintiffs against the respective bills for property transfer tax as well as their lawsuits before the Finance Court were unsuccessful. The Federal Court of Finance stayed proceedings in both cases and referred them to the Federal Constitutional Court for review of whether the auxiliary basis of assessment is constitutional.
Key Considerations of the Senate:
1. The referrals are admissible.
The fact that the Federal Constitutional Court has determined a provision to be incompatible with Art. 3 sec. 1 GG and has ordered its continued application for a certain period of time, as it did in its order of 7 November 2006 (Entscheidungen des Bundesverfassungsgerichts, Decisions of the Federal Constitutional Court – BVerfGE 117, 1) concerning §§ 138 et seq. BewG, does not preclude the regular courts from referring this provision to the Federal Constitutional Court for review pursuant to Art. 100 sec. 1 GG during the period in which it continues to apply as long as the referral concerns a different aspect of the provision.
2. § 8 sec. 2 GrEStG violates the principle of equality (Art. 3 sec. 1 GG).
a) If under the auxiliary basis of assessment enshrined in § 8 sec. 2 GrEStG the provisions on valuation (§§ 138 et seq. BewG) are used to calculate property transfer tax, one treats assessees so assessed highly unequal compared to assessees whose property transfer tax is calculated on the basis of the regular basis of assessment enshrined in § 8 sec. 1 GrEStG.
aa) Since the parties to property transfer contracts usually pursue opposed interests, the performance exchanged for the property in question will usually correspond to the fair market value (gemeiner Wert) of the property. However, if this performance considerably exceeds or falls behind the property’s value, legal practice assumes the difference to be a gift liable to gift tax.
bb) The values calculated pursuant to the rules of valuation under §§ 138 et seq. BewG, which serve as auxiliary basis of assessment, however, deviate considerably from the fair market value. Such were the findings in the order of the Federal Constitutional Court of 7 November 2006 (BVerfGE 117, 1), which are admissible in the proceedings at hand. What is decisive is that in the end, the rules of valuation of both types of taxes aim at determining the fair market value.
When applied to developed real estate, the simplified capitalised earnings value method (vereinfachtes Ertragswertverfahren) enshrined in § 146 sec. 2 BewG leads to values lying on average 50% below the price paid by the buyer and thus under the fair market value. Furthermore, the rigid multiplier of 12.5 used to determine the average earnings is structurally unsuitable for achieving results that are sufficiently close to the fair market value as to satisfy the requirements of the principle of equality; individual results range from less than 20% to more than 100% of the fair market value.
According to § 145 sec. 3 BewG, the value of undeveloped real estate is calculated on the basis of the publicly registered land value (Bodenrichtwert), which is reduced by 20%. If one takes into account that publicly registered land values are cautiously calculated, one will reach valuation results averaging approximately only 70% of the market value.
Pursuant to § 144 BewG, the value of real estate used for agricultural or forestry purposes (land- und forstwirtschaftlicher Grundbesitzwert) is the sum of a property’s operational value (Betriebswert), the value of any staff housing (Betriebswohnungen) and of the value of any living area (Wohnteil). The values of staff housing and of living areas are subject to the same inequalities as the values of developed plots. What is more, the values of real estate used for agricultural or forestry purposes average approximately only 10% of the plots’ market values.
b) There are no sufficiently weighty reasons that could justify this considerable unequal treatment; therefore, it violates Art. 3 sec. 1 GG.
The deviations from the fair market value that usually accompany the auxiliary basis of assessment cannot be justified by any policy aims the rules of valuation might have. Since the law, by stipulating the performance exchanged for transferred property to be the regular basis of assessment, obviously only pursues the fiscal aim of taxing tax-relevant property transfer acts on the basis of the market value it cannot pursue different aims with the auxiliary basis of assessment. Policy aims embodied only in the auxiliary basis of assessment are therefore unable to justify treatment that is discriminatory when compared to treatment under the regular basis of assessment. This unequal treatment violates the Constitution’s requirement of designing auxiliary bases for assessment in a way that they produce results that come more or less close to those under the regular basis of assessment.
Nor can the leeway the legislature’s authority to use typification gives it, primarily to simplify administration, justify the deficiency of valuation. The legislature may design provisions on valuation in a way that makes them as easy as possible to apply and in order to do so may even accept valuation results that are inaccurate in detail. Yet, the valuation disparities found by the court are of a structural nature and are not based on efforts to typify or generalise on the part of the legislature. The objectionable rules of valuation either aim deliberately at undervaluing real estate property, as goes particularly for real estate used for agricultural or forestry purposes, or systematically use parameters that are inadequate or falsify values, or more or less unintentionally lead to random results. None of these deficits, however, are the result of a deliberate decision by the legislature to use typification for the area of property transfer tax. And even if they were, due to their severity they could not be considered constitutionally acceptable inaccuracies in individual cases.
c) While the legislature with effect of 1 January 2007, by abandoning its approach of relying on the values of 1 January 1996 to valuate undeveloped real estate, eliminated a cause of errors, this does not alter the overall constitutional evaluation of the unequal treatment under the regular and the auxiliary bases of assessment, particularly concerning the general undervaluation of real estate as well as of real estate used for agricultural or forestry purposes.
3. The violation of Art. 3 sec. 1 GG concerns only the provision on the auxiliary basis of assessment; this provision cannot be applied after 1 January 2009 and must be replaced with a new provision by the legislature. The provision of § 11 sec. 1 GrEStG regulating the tax rate is not affected by this decision. The fact that the auxiliary basis of assessment is inapplicable does not bar application of the regular basis of assessment enshrined in § 8 sec. 1 GrEStG.