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Different treatment in terms of property transfer tax of compulsory and voluntary building land readjustment is constitutional

Press Release No. 26/2015 of 30 April 2015

Order of 24 March 2015
1 BvR 2880/11

The fact that transfers of real estate property necessitated by compulsory building land readjustment measures are exempt from property transfer tax while transfers by way of a voluntary building land readjustment are not, does not violate the general principle of equality. Such was the decision of the First Senate of the Federal Constitutional Court in an order published today. In terms of urban planning, both types of readjustment are aimed at the same goals. However, they differ when it comes to the applicable procedures involved and to whether participation is on a voluntary basis. Considering the property transfer tax’ character as a tax on private legal transactions, these differences are significant enough to justify the legislature according different treatment to the different types of readjustment. The decision was taken with 6 : 2 votes.

Facts of the Case and Procedural History:

Building land readjustments reform the way plots are partitioned in order to ensure that they may be used in a way that is effective and corresponds to land-use planning. To this end, §§ 45 et seq. of the Building Code (Baugesetzbuch – BauGB) provide for a state-run procedure that is to be carried out by the municipality. Voluntary building land readjustments are possible in cases in which landowners are willing and able to make land readjustments that correspond to land-use planning by way of private contract. § 1 sec. 1 no. 3 sentence 2 letter b of the Property Transfer Tax Act provides that, in principle, transfers of real estate property by way of (compulsory) building land readjustment are exempt from property transfer tax; there is no corresponding exemption for voluntary readjustments.

By way of voluntary building land readjustment, the complainants acquired plots from a municipality and transferred parts of their plots to the municipality. The tax office assessed property transfer tax against the complainants. The complainants’ objections and lawsuits against this assessment were unsuccessful at all levels of jurisdiction.

Key Considerations of the Senate:

The fact that only property transfers by way of the compulsory readjustment procedure under §§ 45 et seq. BauGB are exempt from property transfer tax while transfers by way of voluntary readjustment are not, does not violate the general principle of equality under Art. 3 sec. 1 of the Basic Law (Grundgesetz – GG).

1. a) Art. 3 sec. 1 GG mandates that everyone be treated equally by the law. It also prohibits exceptions from preferential treatment that lead to one group receiving such treatment while another does not and thus violate the principle of equality. However, Art. 3 sec. 1 GG does not completely bar the legislature from differentiating; differentiations must, however, always be justified by substantial reasons that are appropriate in light of the aim and the extent of the unequal treatment. As to the relevant substantial reasons, the general principle of equality imposes varying limits on the legislature depending on the subject-matter of the law in question and on the criteria of differentiation. In tax law, the point of departure is the principle of equal imposition of burdens. The principle of equality accords the legislature broad discretion both in choosing the object of taxation and in determining the tax rate. However, once a decision on the burden imposed has been made by having chosen the object of taxation, any deviations must be measured against the principle of equality. The requirements for the justification rise as a function of the scope and scale of the deviation.

b) Accordingly, when reviewing whether the principle of equality has been violated, the unequal treatment in terms of property transfer tax of voluntary and compulsory readjustment need not be measured against a strict standard of proportionality. Since participation in contractual readjustment is usually voluntary, citizens are able to decide whether they want to participate or not. Compared to the above-mentioned exemptions from property transfer tax, the taxation of voluntary land readjustments neither has a liberty-restricting effect nor is there any relation to the prohibitions of discrimination in Art. 3 sec. 3 GG. Furthermore, the exemption is not on a scale as to cause the differentiation made to require a stricter standard of review. Thus, the legislature possesses considerable leeway when designing exemptions from property transfer tax.

2. According to this generous standard, the differences between property transfers by way of compulsory readjustment and by way of voluntary readjustment are of such nature and gravity as to justify the two forms of building land readjustment to receive different treatment in terms of property transfer tax.

a) Property transfer tax is a tax on private legal transactions; it applies to private uses of property. Contrary to compulsory readjustments, participation in contractual readjustments usually is voluntary.

aa) Compulsory readjustments under §§ 45 et seq. BauGB restrict the owner’s freedom to dispose of his or her property, which is protected by the Constitution. In such cases, the holders of rights to the respective plots are not equal parties to a contract but parties to administrative proceedings. Notwithstanding individual provisions that aim at making the parties participate in a cooperative manner, compulsory readjustments by virtue of their concept as enshrined in the statutory provisions constitute a formal and forced exchange of real estate plots. After having been ordered by the municipality and following a hearing of the owners, the readjustment is initiated by an administrative act that is binding upon all parties to the proceedings. The transfer of property is also effectuated according to public law principles.

bb) Voluntary readjustments, however, are contractual agreements that concern consensual reforms of the way plots are allocated. According to the jurisprudence of the Federal Administrative Court, they enable the contracting parties to make arrangements of a kind that could not unilaterally be made in the formal procedure for compulsory readjustment, such as for standards of distribution or for allocation of costs that deviate from those of the Building Code. The property is transferred by way of private legal transaction.

b) Even though both forms of readjustment aim at the same goals in terms of urban planning, if one takes due account of the property transfer tax’ character as a tax on private legal transactions, the differences concerning the applicable procedure as well as whether participation in the readjustment is on a voluntary basis are of such gravity as to justify the legislature according different treatment to the different forms of readjustment.

The statements submitted to the Court have not yielded that in municipal practice voluntary and compulsory readjustment are treated as being freely interchangeable and cannot for that reason be differentiated. Rather, they are apparently regarded as instruments for land reallocation that are of clearly different legal character and therefore possess individual advantages and disadvantages. As such, they are deliberately used according to the local structure of plots and property. According to the statements submitted, which match to a large extent in this respect, voluntary readjustments, for instance, are considered only in cases of distribution issues that will most likely be solvable by way of consensus. Should a voluntary readjustment fail, this failure does not always and automatically lead to a compulsory readjustment.