Federal Constitutional Court - Press office -
Press release no. 58/2008 of 28 May 2008
Order of 15 January 2008 – 1 BvL 2/04 –
Exemption from trade tax for the self-employed and farmers
and § 15.3 no. 1 of the Income Tax Act constitutional
The First Senate of the Federal Constitutional Court was asked for a
decision on two trade tax-related issues based on a submission from the
Finance Court of Lower Saxony (Niedersächsisches Finanzgericht) and
came to the following conclusion:
It is consistent with the principle of equality before the law that the
earnings of independent professionals, other self-employed persons, and
farmers and forestry managers are not subject to trade tax.
Likewise, the fact that in accordance with § 15.3 no. 1 of the Income
Tax Act (Einkommensteuergesetz - EStG) the entire income of a
partnership is regarded as business profits and is thus liable to trade
tax even if only part of it arises from commercial activity (known in
German as the Abfärberegelung) does not constitute a violation of the
principle of equality before the law.
In essence, the decision is based on the following considerations:
I. When reaching its decision regarding whether independent
professionals, other self-employed persons, and farmers and
forestry managers are to be subject to trade tax in the same way as
other trade professionals, the legislature did not exceed the
margin of discretion and appreciation afforded to it. There are
still sufficiently tenable grounds for drawing this distinction.
1. Not subjecting the independent professions to trade tax reflects
a legal tradition which stretches back more than 70 years. The
legislature may continue to distinguish between trade
professionals and independent professionals in this way, as has
been the tradition over such a long period, until such time as
it becomes obvious that differences no longer exist between the
two groups as regards taxable object and key tax features. This
is, however, not the case. Even though it is necessary to define
typical facts, the generally academic or comparable, specialised
vocational qualification or creative talent which is a
precondition for learning or exercising an independent
profession, the particular significance of the fact that the
work is performed in person, under one's own authority and
independently, linked to the oftentimes highly personal
relationship of trust with clients, as well as the specific
government regulations applicable to numerous independent
professions, and the fact that regulations are often established
autonomously by the profession, especially as regards
professional obligations and terms and conditions regarding
fees, still reveal significant differences between independent
professionals and trade professionals even today.
These differences bear an objective relation to the traditional
justification for trade tax resulting from the principle of
equivalence. Accordingly, the decision to exempt the independent
professions from the liability to pay trade tax is not
arbitrary. The idea still holds that trade tax compensates in a
general fashion for the specific infrastructure burdens caused
by the establishment of commercial enterprises. The assumption
that the independent professions typically give rise to
infrastructure burdens on municipalities to a lesser extent than
trade professionals do suggests itself. The similarities between
the job descriptions of a number of independent professions on
the one hand and trade professionals on the other hand does not
alter the fact that the independent professions can justifiably
be categorised as generally requiring less personnel and
production means. Drawing a distinction based on this assumption
is above all also justified bearing in mind that the tax-free
allowances for trade tax on earnings and - up until 1993 - for
trade tax on business capital have been increased on several
occasions. This has meant that over the past few years only
around 30 per cent of trade professionals have actually been
liable to pay trade tax. Thus, smaller commercial enterprises,
which can best be compared with the independent professions in
terms of their use of infrastructure services, are not subject
to the tax, although high-earning enterprises, i.e. generally
medium-sized and large commercial enterprises which typically
give rise to greater infrastructure burdens, are.
2. There is one key aspect which distinguishes farmers and forestry
managers from trade professionals, namely the production factor
land, which is of particular relevance on account of these
operations being bound to the land and their economic success
being dependent on weather conditions. In addition, they are
subject to a special tax, namely land tax. The Federal
Constitutional Court has thus in the past felt that it is within
the legislature's margin of discretion not to make farmers and
forestry managers liable to pay trade tax.
3. Finally, various provisions governing allowances and
compensation in the law on income tax which are aimed at
reducing or eliminating as far as possible the "double taxation"
of commercial enterprises on account of their having to pay both
income tax and trade tax considerably mitigate, ultimately, the
impact of the resulting unequal treatment of trade professionals
and independent professionals, other self-employed persons, and
farmers and forestry managers and thus also rule out the
assumption that the legislature has acted arbitrarily.
II. § 15.3 no. 1 EStG is consistent with the principle of equality
before the law. There are sufficiently substantiated grounds to
justify the resulting unequal treatment of mixed partnerships and
sole traders, who, in contrast to partnerships, may simultaneously
draw income from various sources.
The primary objective of this provision is to simplify the
determining of the income of mixed partnerships by defining all
forms of income as "income from commercial activity". The objection
raised, namely that the difficulties in determining the income and
delimiting the sources of income apply in the same way to sole
traders, ignores the extent of the problems associated with
partnerships. Where an individual is liable to pay tax, various
sources of income need to be delimited but there is only one
taxable object. In the case of partnerships, by contrast, several
sources of income need to be delimited for several persons liable
to pay tax, and the amounts of the income can vary. This opens up
multifarious possible combinations of activity and assets plus
sources of income and persons liable to pay tax within a
partnership which go well beyond the possibilities open to a sole
trader. Further, there are a number of special tax features
associated with determining the earnings of a partnership which a
sole trader lacks. In view of these difficulties, it is
constitutionally unobjectionable that the legislature has felt that
there is, in the case of partnerships, an important need to
simplify the determination of income.
A further legitimate objective of the provision is that it
safeguards trade tax revenue. The provision set out in § 15.3 no. 1
EStG aims to prevent commercial income not being subject to trade
tax on account of the insufficient means of distinguishing between
various activities within one enterprise.
The disadvantages arising for partnerships which are associated
with the definition of typical facts under § 15.3 no. 1 EStG stand
in justifiable relation to the objectives of the provision.
Although the concomitant unequal treatment of partnerships is
indeed of considerable consequence, the burden is above all
mitigated on account of the possibility of circumventing the
aforementioned provision by means of choosing a corporate structure
which is not associated with any significant burdens or risks.
This press release is also available in the original german version.
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