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Amendment to the tax deduction for a home office held unconstitutional
Press Release No. 55/2010 of 29 July 2010
Order of 06 July 2010
2 BvL 13/09
The 1996 Annual Tax Act (Jahressteuergesetz) amended § 4.5 sentence 1 no. 6b of the Income Tax Act (Einkommensteuergesetz - EStG) by restricting for the first time the tax deductibility of expenses for a home office used exclusively for business or work-related activities as operating expenses or income-related expenses. There was an exception to the general disallowance of a deduction for such expenses if the use of the home office for business or work-related activities exceeded 50% of the entire business or work-related activities or if no other office was available for the business or work-related activities. However, the expenses could only be deducted in full if the home office was the centre of the entire business activities or work-related activities. The Federal Constitutional Court affirmed the constitutionality of this restriction in its decision of 7 December 1999 (Decisions of the Federal Constitutional Court (Entscheidungen des Bundesverfassungsgerichts - BVerfGE) 101, 297).
The 2007 Tax Amendment Act (Steueränderungsgesetz) further restricted the possibility of deducting such expenses. § 4.5 sentence 1 no. 6b EStG only permits a deduction for the expenses of a home office and the costs of equipping it if the home office is the centre of the entire business or work-related activities. The plaintiff in the original proceedings, who worked as a teacher at a non-selective secondary school, used his home office for two hours each day; the office was used exclusively for work-related activities. His application to the school administrative body requesting an office at the school where he could prepare and review lessons was rejected. The tax office did not recognise the expenses claimed by the plaintiff for his home office in his 2007 income tax declaration. His resulting action before the Finance Court led such court to refer the matter to the Federal Constitutional Court for a decision.
The Second Senate of the Federal Constitutional Court decided with 5:3 votes that the amendment of § 4.5 sentence 1 no. 6b EStG violated the general principle of equality before the law to the extent that it also disallowed a tax deduction for expenses for a home office where no other office was available for the business or work-related activities. As a result of this decision, the legislature is obliged to remove the unconstitutional state of affairs with retrospective effect to 1 January 2007 by amending § 4.5 sentence 1 no. 6b EStG. The courts and administrative authorities are no longer permitted to apply the provision to the extent it has been held incompatible with the Basic Law (Grundgesetz - GG) and are required to stay any current proceedings.
In essence, the decision is based on the following considerations:
The general principle of equality before the law requires the legislature to adequately and consistently take taxpayers' ability to pay into consideration in its decision on the imposition of the tax burden. Taxpayers' ability to pay, which is central to ensuring that they are subject to the same tax burden under income tax law, is measured, among other things, according to the objective net principle. According to this principle, expenses that accrue for business or work-related reasons must be deducted as operating expenses or income-related expenses from the assessment base. If the legislature wishes to create exceptions to its fundamental decision on the imposition of the tax burden which increase this burden it requires a special objective reason in order to satisfy the requirements of the general principle of equality before the law.
This is missing here. The fiscal reasons provided during the legislative procedure are not suitable for justifying the amendment in light of the general principle of equality before the law. The goal of increasing revenue is not in and of itself a sufficiently objective reason for allowing exceptions to a consistent decision on the imposition of the tax burden under income tax law. The reason for this is that every tax increase, including an arbitrary one, serves the goal of increasing revenue.
In addition, the amendment fails to satisfy the requirement that laws be based on sufficiently realistic categorisations to the extent that it also does not recognise expenses for a home office where no other office is available for the business or work-related activities. After all the non-existence of an alternative office, which can be easily proved through the submission of a certificate from the employer, provides an easily verifiable factual basis for establishing that the home office really is used for business or work-related activities and thus for establishing a categorisation for distinguishing the business from the private sphere. In contrast, ascertaining and determining which costs are exempt from the disallowance of a deduction of costs for a home office, which is the "qualitative" "centre" of the entire business or work-related activities, would obviously involve considerable effort and be controversial. When measured in terms of the Act's goals, i.e. simplification, avoidance of disputes and taxation equality, the deduction disallowance does not, therefore, to the extent it applies to the cases in which there is "no other office" meet the requirement that laws be based on sufficiently realistic categorisations.
The Federal Constitutional Court extended its review and decided, however, that the extension of the deduction disallowance did not violate the general principle of equality before the law to the extent that it also included expenses for a home office whose exclusive use for business or work-related activities exceeded 50% of the entire business or work-related activities. The scope of use of the home office is at most a weak indication of its necessity in those cases where the taxpayer's employer provides him or her with another office. In addition, there are no easily verifiable objective criteria which can be used for checking the taxpayer's submissions as to the amount of time he or she uses the office.