Protection of Legitimate Expectations of the Continued Application of a Fiscal Law Provision

Press Release No. 76/2012 of 09 November 2012

Order of 10 October 2012
1 BvL 6/07

The First Senate of the Federal Constitutional Court has refined its jurisprudence on the retroactivity of fiscal statutes following on from several orders of the Second Senate dated July 2010. Retroactive amendments to fiscal law for an assessment or accounting period which is still running are cases of “quasi” retroactivity (unechte Rückwirkung) and not in principle impermissible. They are however similar to cases of “true” retroactivity (echte Rückwirkung), and are hence subject to special requirements from the point of view of the protection of legitimate expectations and proportionality. Legitimate expectation of the continued application of the law is questioned by the introduction of a draft bill and certainly destroyed by the definitive resolution of the German Bundestag on the retroactive statute. In the case submitted here of a provision which has been proposed for the first time in the mediation procedure between the Bundestag and the Bundesrat, the legitimate expectation of the continued application of the law as it stands is eliminated by the proposal made by the Mediation Committee (Vermittlungsausschuss).

The submission made by the Münster Finance Court (Finanzgericht) relates to the question of whether the former § 36 sec. 4 of the Trade Tax Act (Gewerbesteuergesetz) in the version of the Act Refining Company Tax Law (Gesetz zur Fortentwicklung des Unternehmenssteuerrechts) of 20 December 2001 (Federal Law Gazette, Bundesgesetzblatt – BGBl I p. 3858, hereafter: Trade Tax Act old) orders the application of § 8 no. 5 of the Trade Tax Act with constitutionally impermissible retroactivity already for the 2001 accounting period.

According to the order of the First Senate of 10 October 2012, retroactive enactment is constitutional insofar as it relates to the period after the proposal of the Mediation Committee made on 11 December 2001.Insofar as, by contrast, it includes advance distributions that were decided on and accrued up to and including 11 December 2001, this is incompatible with the principles of the protection of legitimate expectations (Article 20 sec. 3 of the Basic Law (Grundgesetz – GG)), and hence unconstitutional.

In Essence, the Decision is Based on the Following Considerations:

1. The provision contained in § 8 no. 5 of the Trade Tax Act, which was retroactively enacted, is related to the system change in the law on corporation tax from the previous imputation system to what used to be known as the half-income system (Halbeinkünfteverfahren) [Half of the dividend which had been paid out, on which 25% corporation tax had been levied, was included in the shareholder's income tax assessment basis.]. In this system, the dividends not assessed according to income tax or corporation tax law from “ownership of free-float shares” of fewer than 10% (since 2008: fewer than 15%) are added to the profit in the law on trade tax.

2. The Federal Government’s draft bill had initially not provided for a provision on this question. It was only the recommendation for a resolution of the Mediation Committee dated 11 December 2001 which contained the provision which later passed into law. The Bundestag passed a resolution on 14 December 2001, in line with the proposal made by the Mediation Committee; the Bundesrat concurred on 20 December 2001. The Act was promulgated in the Federal Law Gazette on 24 December 2001.
3. The provision contained in § 36 sec. 4 of the Trade Tax Act old, according to which § 8 no. 5 of the Trade Tax Act is to be applied to the 2001 accounting period for the first time, leads to ”quasi” retroactivity.

a) According to the established case-law of the Federal Constitutional Court, “true” retroactivity only applies in fiscal law if the legislature subsequently amends a tax debt which has already arisen (see most recently the orders of the Second Senate of 7 July 2010; Decisions of the Federal Constitutional Court (Entscheidungen des Bundesverfassungsgerichts – BVerfGE) 127, 1; 127, 31; 127, 61). The amendment of provisions of fiscal law with effect for an ongoing assessment or accounting period is to be attributed to the category of “quasi” retroactivity and – in contradistinction to “true” retroactivity – is not in principle impermissible.

b) Retroactive provisions within an assessment or accounting period are however similar to cases of “true” retroactivity in many respects. More stringent requirements therefore apply to compatibility with the Constitution. If the legislature reforms company tax law during the ongoing accounting period and relates the legal amendments to the beginning of this period, the unfavourable impact of a disappointment of legitimate expectations which are eligible for protection must be proportionate.

4. The distribution of dividends is not necessarily the result of acts by an owner of free-float shares which are based on specific legitimate expectations. However, at least within the assessment period, the owner of free-float shares can legitimately rely on the law in force at the time of the acts.

a) Once a draft bill has been introduced in the Bundestag by a body entitled to introduce bills, taxpayers may no longer unrestrictedly expect the law currently applicable to continue to apply unchanged. At least from the time of the definitive resolution of the Bundestag, those concerned must, according to the established case-law of the Federal Constitutional Court, anticipate that the new provision will be promulgated and will enter into force.

b) It is characteristic of the case at hand that the provision which was enacted retroactively was contained for the first time in the Mediation Committee’s recommendation for a resolution dated 11 December 2001. As to its expectation-impeding impact, the recommendation for a resolution of the Mediation Committee not only corresponds to a draft bill, but goes beyond it. The acceptance of such a mediation proposal by the Bundestag is as a rule considerably more probable than that of a draft bill because the mediation proposal is situated at the end of the parliamentary decision-making process, including the efforts of the Mediation Committee to reach a compromise, and marks its outcome.

5. § 36 sec. 4 of the Trade Tax Act old is constitutional insofar as it declares § 8 no. 5 of the Trade Tax Act to be applicable to advance dividends which accrued subsequent to 11 December 2001. This also applies insofar as the accrual took place prior to promulgation in the Federal Law Gazette of 24 December 2001. In one of its orders dated 7 July 2010, the Federal Constitutional Court granted protection of legitimate expectations in the event that the accrual of funds took place prior to the promulgation of the new provision (BVerfGE 127, 31). This was however a matter of severance agreements between employers and employees, on conclusion of which the employee disposes of his or her employment contract, and hence of parts of his or her economic existence. The case constellation at hand is not comparable with such a case.