Sufficiently weighty factual reasons needed to justify degressive tax scale for secondary residences

Press Release No. 10/2014 of 14 February 2014

Order of 15 January 2014
1 BvR 1656/09

In an order published today, the First Senate of the Federal Constitutional Court granted the constitutional complaint against a secondary residency tax assessment issued by the City of Konstanz and voided the underlying byelaws dating from 1989, 2002 and 2006. Where a degressive tax scale for secondary residences is not justified by sufficiently weighty factual reasons – as in the present case – it violates the requirement to tax according to economic capacity derived from the right to equality under Art. 3 sec. 1 of the Basic Law (Grundgesetz – GG). Moreover, the Senate specified the temporal requirements for lodging constitutional complaints by telefax: a person has regularly exercised a reasonable level of care when he or she has allowed a 20-minute safety margin before the expiry of the time-limit in excess of the expected time needed for the transmission of the briefs to be faxed, including annexes.

Facts of the Case and Course of the Proceedings:

The City of Konstanz, the defendant of the initial proceedings, imposed a byelaws-based tax on secondary residences on the complainant for the years 2002 to 2006.

1. The tax scales are based on the annual rental expense as a basis of tax assessment and generalise the tax amount by establishing five (1989 Byelaw on the Taxation on Secondary Residences) or eight (2002/2006 Byelaws on the Taxation on Secondary Residences) rental expense groups respectively. In relation to the rental expense, the specific design of the tax scales leads to an overall degressive tax scheme. The absolute amount of the tax on secondary residences increases gradually as the annual rent increases. However, as rental expenses increase, the tax rate resulting from the rental expense together with the tax amount decreases across all tax brackets not only within the respective bracket.

2. From 1 January 2002 to 31 August 2006, the complainant occupied a secondary residence within the municipality of Konstanz, which his parents had provided to him. The defendant imposed a tax on secondary residences on the complainant in the amount of (most recently) € 2,974.32 for this time period. Both the objection lodged and the action brought against the imposition of the tax were unsuccessful.

Key Considerations of the Senate:

The constitutional complaint is admissible and, in essence, well founded. The degressive design of the tax scales for secondary residences as well as the decisions of the defendant and the regular courts violate Art. 3 sec. 1 GG.

1. The complainant lodged the constitutional complaint after the respective time limit had expired. However, he was prevented from observing the time limit without fault of his own, as the fax line of the Federal Constitutional Court was busy between the first transmission attempt at 22:57 and 24:00 hours on 29 June 2009. Therefore, the complainant must be reinstated to his former position on the basis of his timely application.

a) Reinstatement into the former position may only be granted if the complainant has failed to observe the time limit without fault, that is, neither intentionally nor negligently. A person acts negligently if he or she fails to start the transmission of a complaint brief together with the required annexes in a timely fashion such that, under normal circumstances, it may be expected that the transmission will still be completed on the day of the expiry of the time limit. In proceedings before the Federal Constitutional Court, a person has exercised the level of care reasonably to be expected if he or she has allowed a safety margin of 20 minutes in excess of the expected time needed for the transmission of the briefs to be faxed, including annexes. For the calculation of the time limit, and thus also for observing the safety margin, the point in time at which the complaint brief together with the annexes has been completely received by the Federal Constitutional Court is decisive, not, however, the completeness of the printout. Finally, the requirements of care have only been met by a person who repeatedly attempts transmission within the relevant period of time.

b) Therefore, there has been no fault on the part of the complainant with regard to the failure to observe the time limit, since he had allowed for an adequate safety margin. The complainant has produced prima facie evidence that he tried for the first time at 22:57 on the day of the expiry of the time limit to transmit the complaint brief together with the annexes to the Federal Constitutional Court, and that he repeated his transmission attempt several times until the expiry of the time limit. Consequently, he had allowed for a safety margin of approximately 50 minutes.

2. The degressive tax scale in the Byelaws on the Taxation on Secondary Residences from 1989, 2002 and 2006 violates the right to equality of Art. 3 sec. 1 GG in its manifestation as a requirement to tax according to economic capacity.

a) Being a local expenditure tax within the meaning of Art. 102 sec. 2a sentence 1 GG, the tax on secondary residences must satisfy the requirement to tax according to economic capacity derived from the general principle of equality. The essential characteristic of an expenditure tax is to target the economic capacity reflected in the use of the income; the economic capacity is reflected by the respective rental expense, which is used as a basis of assessment for the tax on secondary residences.

b) The degressive tax scale leads to unequal treatment of the taxpayers, as it places a higher burden, as a percentage, on taxpayers who have less economic capacity than those who have greater economic capacity. This is the case because the bracket tariff results largely in a decreasing tax rate as rental expenses increase. Such unequal treatment already becomes apparent by comparing the averaged tax rates within the tax brackets. Further unequal treatment results from the differences in the tax burden due to the categorising brackets: thus, the tax burden within the second tax bracket decreases according to the 1989 Byelaw from nearly 40% to approximately 26% of the rental expenses, and according to the 2002/2006 Byelaws from approximately 34.8% to 21.8%. Taxpayers with an annual rent in the lower range of the respective tax bracket are, overall, most heavily burdened. The minimum and maximum amount brackets further intensify this degressive effect.

c) Degressive tax scales are not generally prohibited, because the legislature is not obliged to implement the capacity principle in a pure manner and without exception. However, with respect to the justification of exceptions, the legislature is bound by limits which go beyond the prohibition of arbitrariness imposed by the capacity principle as a substantive measure of equality. In this respect, the Federal Constitutional Court is merely called upon to examine whether the legislature has exceeded the constitutional limits of its discretion, not whether it has found the most appropriate or most equitable solution.

d) The unequal treatment caused by the degressive tax scales is no longer justified in the case at hand.

aa) Categorisation and simplification requirements may generally constitute objective reasons for a limitation of taxation according to capacity. However, the overall degressive development of the tax scale, that is, the degressive development across different brackets, is, from the outset, unsuitable for simplification. While the tax brackets in fact lead to a certain simplification due to the fact that the annual net rent does not need to be determined in each individual case and verified in cases of doubt, this effect is not sufficiently weighty. The difference between the highest and the lowest tax burden within the same bracket already reaches a substantial level which is unacceptable in light of the overall degressive tariff scheme. Another factor is the effects of the degression between the individual brackets: between the tax on secondary residences in the case of a rental expense of € 1,200 and in the case of a rental expense of € 24,000, a difference of 29 percentage points results according to the 1989 Byelaw (tax burden of 34% or 5%) and a difference of 27 percentage points according to the 2002/2006 Byelaws (tax burden 33% or 6%).

bb) Steering purposes do not justify unequal treatment in the present case either. It is a legitimate aim to encourage taxpayers to change the registration of the secondary residence to a principal residence in accordance with the respective legislative requirements. Another legitimate steering purpose is to increase the housing supply for the local population, and in particular for students of local universities. However, the tax differential caused by a degressive tax scheme is neither suitable nor necessary to achieve these purposes. While charging a tax on secondary residences may be suitable overall to encourage holders of a secondary residence to register it as a principal residence, the degressive design of the tax scale itself does not promote this purpose. This objective would be achieved in the same way by a linear or even progressive tax scale, which would avoid the unequal treatment established in the present case. The same applies to the purpose of limiting secondary residences.

3. The Byelaws on the Taxation of Secondary Residences from the years 1989, 2002 and 2006 are therefore null and void. The challenged assessments of the defendant and the decisions by the Administrative Court and the Higher Administrative Court are reversed. The matter is remitted to the Higher Administrative Court for a decision on the costs of the proceedings.