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Judicial referral from the Federal Finance Court on "minimum taxation" under the Tax Relief Act 1999/2000/2002 impermissible
Press Release No. 99/2010 of 03 November 2010
Order of 12 October 2010
2 BvL 59/06
Under § 2.1 of the Income Tax Act (Einkommensteuergesetz - EStG), income tax is payable only on income which can be assigned to one of the seven income categories listed there. Under § 2.3 EStG, tax assessment is based on the "sum of income", that is, positive and negative results must be set off against each other (same-period loss set-off). Where negative income exceeds positive income in the relevant assessment period, the excess losses are deducted in other assessment periods under § 10d EStG (cross-period loss set-off).
In the 1990s there was a significant decrease in revenue from assessed income tax (Einkommensteuer), from DM 41.5 billion in the year 1992 to DM 11.6 billion in the year 1996 and DM 5.8 billion in the year 1997, while wage tax (Lohnsteuer) revenue remained virtually unchanged in the same period (DM 247.3 billion in the year 1992 and DM 248.7 billion in the year 1997). This was attributed in particular to the use by high earning taxpayers of tax planning possibilities.
In order to counteract this, the legislature, in the Tax Relief Act 1999/2000/2002, introduced a general restriction on loss set-off with effect from the 1999 assessment period. This provided that if positive income exceeded DM 100,000, only half of the excess could be reduced by set-off against corresponding losses, and therefore at least half of the amount exceeding DM 100,000 was subject to taxation (known as minimum taxation). Under § 2.3 EStG new, losses not set off in this way were not taken into account in the year when they accrued, but - similarly restricted under § 10d EStG new with the necessary alterations - could be set off in other assessment periods. However, the loss set-off was only restricted in the case where the losses had occurred in another income category than the positive income. Within the same income category, loss set-off remained possible without restriction. In the particular case, this resulted in complex calculations involving many individual steps, some of which were repeated. With effect from the 2004 assessment period, this provision was repealed on the grounds that it had been found to be cumbersome in practice.
The judicial referral from the Federal Finance Court (Bundesfinanzhof) relates to the 1999 assessment period, in which the plaintiffs in the original proceedings - jointly assessed spouses - in the tax assessment notice last altered during the proceedings for appeal on a point of law had earned predominantly positive income, mainly from a business enterprise (§ 15 EStG) in the amount of just under DM 1.8 million. These were to be set off against losses of the husband from letting and leasing (§ 21 EStG) in the amount of just under DM 1.3 million; but the tax office, applying § 2.3 and § 10d EStG as amended by the Tax Relief Act 1999/2000/2002, recognised only just under DM 1 million of this as tax-deductible. The action initiated resulted in the judicial referral by the Federal Finance Court, which regards the provisions on "minimum taxation" in § 2.3 and § 10d EStG as amended by the Tax Relief Act 1999/2000/2002 as unconstitutional, on the basis that they are complex and difficult to understand and therefore the legislation is not well-defined. The Second Senate of the Federal Constitutional Court holds that the judicial referral is impermissible.
In essence, the decision is based on the following considerations:
A court may only obtain the decision of the Federal Constitutional Court on the constitutionality of a legislative provision under Article 100.1 of the Basic Law (Grundgesetz - GG) if it has carefully examined this constitutionality itself. This requires the court to have critically considered the provision presented for review in detail, to have taken into account the opinions developed in case-law and literature, and to have examined different possibilities of interpretation. The various opinions on the conceivable possibilities of interpretation of non-constitutional law must be set out with regard to the fact situation to be decided on, must be discussed and must be constitutionally assessed. If it is the requirements of sufficient specificity and clarity of the legislation that are at issue, the referring court must in particular also show how far a decision in favour of one of the possibilities of interpretation set out would exceed the duty of the agencies for the dispensation of justice to clarify uncertainties and to deal with problems of interpretation with the customary tools of legal methodology.
The decision of the Federal Finance Court of suspension and judicial referral does not fulfil these requirements. The non-constitutional content of § 2.3 and of § 10d EStG as amended by the Tax Relief Act 1999/2000/2002 and the relevant discussions in the literature are not sufficiently treated.
The order for referral deals in comparative detail with the provisions restricting individual loss set-off, but without showing that in themselves they present particular difficulties of understanding. Insofar as the Federal Finance Court in this connection expressed objections to individual concepts, these are merely stylistic defects which do not automatically result in lack of clarity of the content of these concepts. But with regard to the significant problems of clarity of the provisions on loss set-off between jointly assessed spouses and of the references to these provisions in connection with the loss carry-forward and loss carry-back from other assessment periods, the order for referral essentially describes aspects of the complexity only in general and abstract terms. Although the provisions - as is shown by the discussions in the literature - are accessible to systematic treatment, there is no attempt to explore their content in concrete terms. No account is taken of the opinions which regard the provisions as interpretable in their entirety and therefore as constitutional and which have also made specific suggestions which may be regarded as consistent in themselves. Taken as a whole, the order for referral does not consider the basic arithmetical structure - which can certainly be determined by way of interpretation - in the necessary manner, although it is only on this basis that an appropriate review of the problem of clarity is possible. Admittedly, the order does indicate further aspects which might be significant with regard to the problems of legislative clarity when it mentions the complex system of references and the large number of arithmetical steps to be carried out. But this does not make up for the lack of systematic treatment of non-constitutional law and critical examination of the interpretations found in the literature.