Federal Constitutional Court - Press office -
Press release no. 65/2010 of 19 August 2010
Order of 7 July 2010 – 2 BvR 748/05, 2 BvR 753/05, 2 BvR 1738/05 –
Decision regarding retroactive effect in tax law II:
Reduction of the participation quota in the taxation of private sales
of equity shares partly unconstitutional
Under the law applicable until 31 December 1998, gains from the sale of
shares held in private assets in a corporation were liable to income tax
as income from a business enterprise if the taxpayer had a holding of
more than 25 % within the last five years prior to the sale – that is at
any time within this period. After the change of government which took
place in 1998, the participation threshold was reduced to 10 % by the
1999/2000/2002 Tax Relief Act (Steuerentlastungsgesetz), promulgated on
31 March 1999 (§ 17.1 sentence 4 of the Income Tax Act
(Einkommensteuergesetz – EStG)). According to § 52.1 sentence 1 EStG,
the new provision was valid from the 1999 assessment period onwards, but
– retroactively – also included participating relationships which had
already been established prior to its promulgation.
The complainants each held participations from 10 % up to 24.02 % in a
limited company (GmbH) below the old materiality threshold, but above
the new one, one complainant already having transferred a part to her
husband in 1998 in anticipation of the legal amendment, thus reducing
her participation to less than 10 %.As for the rest, the complainants
partly sold their shares prior to the promulgation of the new regulation
(on 11 March 1999), but partly also not until afterwards (in June 1999
and on 23 July 2001, respectively). The tax office applied the reduced
materiality threshold in all cases and allotted the capital gain on
disposal to the taxable income. These decisions were ultimately
confirmed by the Federal Finance Court (Bundesfinanzhof) in response to
the complainants’ actions.
In response to the constitutional complaints, which were combined to
form a joint ruling, the Second Senate of the Federal Constitutional
Court (Bundesverfassungsgericht) ruled that § 17.1 sentence 4, in
conjunction with § 52.1 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 ten-percent participation threshold as
such is not constitutionally objectionable. The material rulings at
final instance have been quashed and the proceedings remitted to the
Federal Constitutional Court for a renewed ruling.
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 reduced materiality
threshold 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 participation was already in existence at the time of
the promulgation of the new provision on 31 March 1999 because the
application of the reduced participation threshold 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. This is only partly the case in the event of the
retroactive reduction of the participation threshold.
Where liability under the law on income tax is restricted to the value
increases which did not occur until after the promulgation of the new
regulation, this does not encounter any constitutional objections in
terms of the protection of legitimate expectations, even if the value
increases in question would have been free of tax according to the old
law. The acquisition of a participation in a specific amount may be
materially determined by the expectation of being able to realise any
value increases free of tax. 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 reduced participation threshold, 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 participation threshold had
not been exceeded. In this respect, a concrete established asset
position had already arisen the value of which is subsequently reduced
by virtue of the retroactive reduction of the participation threshold.
This furthermore leads to unequal treatment which, from the point of
view of equality of burdens, requires a more exacting justification. For
those taxpayers who had already sold their participations, which were
immaterial according to the old law, by the end of 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. 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.
As a primarily future-orientated interest in a legal amendment, the
aspect of combating abuse, which is mentioned in the reasoning for the
Act, also does not justify the liability to tax of tax-free value
increases which have already taken place. Moreover, making abuse more
difficult is a side-effect which only concerns individual cases with
specific circumstances, given that in general the tax-free sale of a
participation does not constitute a misuse of rights. Over and above
combating abuse, there is a legitimate interest in closing any gaps in
taxation. This however also only refers to a general interest in a legal
amendment, but not to one which specifically legitimises the retroactive
effect.
Also, no such legitimation emerges from the difficulty and proneness to
conflict attaching to ascertaining the market price at the time of the
promulgation, to which the reasoning for the Act refers, 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-percent participation threshold 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.
This press release is also available in the original german version.
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