Federal Constitutional Court - Press office -

Press release no. 64/2010 of 19 August 2010

Order of 7 July 2010 – 2 BvL 14/02, 2 BvL 2/04, 2 BvL 13/05 –

Decision regarding retroactive effect in tax law I: 
Extension of the speculation period in the case of transactions for
the sale of land partly unconstitutional


Under the law applicable until 31 December 1998, gains from private 
transactions for the sale of land were liable to income tax if the 
period between acquisition and sale was shorter than two years 
(“speculative transactions”). After the change of government which took 
place in 1998, the period until sale was extended to ten years by the 
1999/2000/2002 Tax Relief Act (Steuerentlastungsgesetz), promulgated on 
31 March 1999 (§ 23.1 sentence 1 no. 1 of the Income Tax Act 
(Einkommensteuergesetz – EStG)). According to § 52.39 sentence 1 EStG, 
the new period applied for the first time from the 1999 assessment 
period onwards, but – retroactively – also covered land that had already 
been acquired where the contract on the sale was not concluded until 
1999 (or later). 

The plaintiffs of the three sets of initial proceedings sold their land 
which they had acquired in 1990 and 1991, respectively, in 1999, after 
the expiry of the old period until sale, but within the new one, the 
underlying contracts in some cases already having been concluded prior 
to the promulgation of the new law (on 26 February and 16 March 1999, 
respectively), but in another case not until afterwards (on 22 April 
1999). The tax office applied the new period until sale in all cases and 
allocated the capital gains to the taxable income. The actions lodged 
led to the submissions made by Cologne Finance Court (Finanzgericht) and 
by the Federal Finance Court (Bundesfinanzhof), respectively, to the 
Federal Constitutional Court (Bundesverfassungsgericht). 

In the proceedings on the constitutionality of a statute, which were 
combined to form a joint ruling, the Second Senate of the Federal 
Constitutional Court ruled that § 23.1 sentence 1 no. 1EStG, in 
conjunction with § 52.39 sentence 1 EStG in the version of the Tax 
Relief Act 1999/2000/2002, is partly unconstitutional because of a 
violation of the constitutional principles of the protection of 
legitimate expectations. By contrast, the extension of the period until 
sale to ten years as such is not constitutionally objectionable. 

In essence, the decision is based on the following considerations:

A “real” retroactive effect, which is not permissible as a matter of 
principle, in which the statutory legal consequences are to already 
apply prior to the time of the promulgation to taxable events which have 
already been completed (“retroactive impact of legal consequences” – 
Rückbewirkung von Rechtsfolgen), does not apply. The extended period 
until sale is not applied until from the assessment period still running 
at the time of the amendment, i.e. to capital gains accrued from 1 
January 1999 onwards. However, an “unreal”, de facto retroactive effect 
applies where the land had already been acquired at the time of the 
promulgation of the new provision on 31 March 1999 because the 
application of the extended period until sale is attached to a past 
event in this respect. This is not prohibited as a matter of principle, 
but is only compatible with the principles, in terms of fundamental 
rights and the rule of law, of the protection of legitimate expectations 
if the retroactive attachment is suitable and necessary to promote the 
purpose of the statute and if the bounds of reasonableness are not 
overstepped in an overall weighing up between the import of the 
disappointed expectation and the urgency of the grounds justifying the 
legal amendment. The retroactive extension of the period until sale is 
only partly compatible with this. 

Where the previously applicable two-year speculation period had not yet 
expired at the time of the promulgation, its extension does not 
encounter any constitutional objections. The same applies where the old 
period had already expired, but only those value increases are liable 
for tax which did not occur until after the promulgation of the new 
provision. The decision to acquire a plot of land may be materially 
determined in an individual case by the expectation of being able to 
realise any capital gains free of tax after two years. The mere 
possibility of gains subsequently accruing free of tax however does not 
give rise to a position which is protected by law on grounds of 
legitimate expectations. It is not possible to expect value increases 
with certainty at the time of acquisition, so that the disappointment of 
the hope of future tax-free asset increases also cannot be regarded as 
an impairment of tangible assets. 

The application of the extended speculation period, however, violates 
the constitutional principles of protection of legitimate expectations 
and is null and void insofar as a value increase which had already 
accrued at the time of the promulgation is made subject to tax, even 
though it had already been realised under the law previously applicable, 
or at least could have been realised free of tax until promulgation of 
the new law because the old speculation period had already expired. In 
this respect, a concrete established asset position had already arisen 
the value of which is subsequently reduced by virtue of the retroactive 
extension of the speculation period. This furthermore leads to unequal 
treatment which, from the point of view of equality of burdens, requires 
a more exacting justification if – as in the initial proceedings – the 
old period had already expired as per the end of 1998. For those 
taxpayers who sold their land no later than 1998, the value increases 
made until then are tax free. 

There are no sufficiently weighty reasons suitable to justify the 
retroactive liability under the law on income tax of value increases 
which had already materialised and which were acquired free of tax. 
Where the new provision is generally reasoned by stating that it does 
better justice to the principle of taxation based on economic capacity, 
and hence also on the principle of fiscal equity, this is significant 
only for the fundamental decision to allot greater significance to 
private capital gains, and hence to value increases of private assets, 
than was previously the case when assessing financial power. This goal 
to “improve” the legal situation designates only the general interest in 
a legal amendment, but is not a specific reason which is amenable to 
legitimise, in particular, retroactive liability to tax of value 
increases which have already been acquired free of tax. 

The same applies to the goal, stated by the legislature, to broaden the 
basis for assessment for financing to compensate for spending. As a 
matter of principle, the intention pure and simple to increase the 
state’s income is per se not a public interest prevailing over the 
protection of legitimate expectations of the taxpayers affected. This 
would mean that the protection of legitimate expectations vis-à-vis 
retroactive tightening up of the tax law would practically be a 
toothless tiger. Also the need to fund tax relief granted in other 
places with additional revenue designates only a general need to change 
that justifies taxing value increases from the time of promulgation, but 
that particularly does not also legitimise the retroactive inclusion of 
asset increases that have already been acquired free of tax. Also, no 
such legitimation emerges from the difficulty and proneness to conflict 
attaching to ascertaining the market price at the time of the 
promulgation, given that this can only justify at best rough estimates 
to be made when ascertaining the value, but not waiving such 
ascertainment altogether. 

The ten-year period until sale as such is, by contrast, not 
constitutionally objectionable. The differently effected income taxation 
of value increases in taxpayers’ assets is compatible with Article 3.1 
of the Basic Law (Grundgesetz – GG). It is the systematic and thus 
correct consequence of the historically developed dualism of types of 
income, and is hence within the latitude accruing to the legislature 
when seeking sources of taxation revenue. It furthermore does not breach 
the general principle of equality, namely that profits from the sale of 
land are not liable to the reduced scale that is applicable to 
extraordinary income according to § 34 EStG. The concept underlying the 
reduced scale for gains from the sale of an establishment, part 
establishment or joint share in a company is that the gainful activity 
is terminated and the hidden reserves accumulated in a whole economic 
life are realised once and for all. The sale of a plot of land, by 
contrast, only relates to one single asset and according to the new 
provision only includes those hidden reserves which have accrued over a 
maximum period of ten years. Finally, in the interest of the clarity and 
manageability of the law, as well as in light of monetary policy 
considerations, it is constitutionally unobjectionable, as the Federal 
Constitutional Court has already ruled, that income tax law is based on 
the nominal value principle, and that the devaluation of money which has 
taken place in the meantime is therefore not taken into consideration 
when calculating the capital gains. 


This press release is also available in the original german version.