Ineligibility of non-German nationals granted residency for humanitarian reasons for a childcare allowance unconstitutional

Press Release No. 67/2022 of 03 August 2022

Order of 28 June 2022 - 2 BvL 9/14, 2 BvL 10/14, 2 BvL 13/14, 2 BvL 14/14

In an order published today, the Second Senate of the Federal Constitutional Court held, on a referral for judicial review from a finance court, that § 62(2) no. 3(b) of the Income Tax Act (Einkommenssteuergesetz – EStG) in the version of the Act on the Eligibility of Foreign Residents for Child Allowances, Child-Raising Allowances and Maintenance of 13 December 2006 (Gesetz zur Anspruchsberechtigung von Ausländern wegen Kindergeld, Erziehungsgeld und Unterhaltsvorschuss) violates the general guarantee of the right to equality under Art. 3(1) of the Basic Law (Grundgesetz – GG) and declared the provision void.

Under the provision referred for review, persons from most non-EU states granted residency in Germany on humanitarian, political or international law grounds may only claim a child allowance (Kindergeld) after three years of continuous legal or otherwise allowed residency and only if they demonstrate their integration into the labour market, i.e. show that they are either legally employed in Germany, receive “unemployment benefits I” (Arbeitslosengeld I) or are taking parental leave.

The 2006 version of § 62(2) EStG (hereinafter EStG 2006) was subsequently amended effective 1 March 2020 [to allow for eligibility for a child allowance in certain cases without the labour market integration criterion].

Facts of the case:

Under § 62(2) EStG 2006, the eligibility of non-German nationals that are not citizens of another EU Member State and do not otherwise have the right of free movement within the EU for a child allowance depends upon what type of residency status they have. Persons with permanent residence permits have an automatic right to a child allowance (§ 62(2) no. 1 EStG 2006). Those with temporary residence permits are entitled to a child allowance if their residence permit includes or previously included a work authorisation (§ 62(2) no. 2 EStG 2006).

Persons whose residence permits were granted on humanitarian, political or international law grounds, however, generally have no right to a child allowance (§ 62(2) no. 2(c) EStG 2006). Previously, the only exception to this exclusion was when a person had continuously resided at least three years in Germany (§ 62(2) no. 3(a) EStG 2006) and also satisfied certain requirements specified in § 62(2) no. 3(b) EStG 2006 relating to integration into the labour market.

In prior proceedings concerning the Federal Act on Child-Raising Allowances (Bundeserziehungsgeldgesetz – BEEG) and the Federal Act on Parental Allowance and Parental Leave (Bundeselterngeld- und Elternzeitgesetz – BErzGG), the Federal Constitutional Court held, in an order dated 10 July 2012 (BVerfGE 132, 72), that statutory language identical to that in § 62(2) no. 3(b) EStG 2006 violated Art. 3(1) and Art. 3(3) first sentence GG and was therefore void.

The four initial proceedings were brought by non-German nationals residing in Germany who are not EU-citizens. Their applications for a child allowance were denied because, while the plaintiffs in the initial proceedings had a residence permit within the meaning of § 62(2) no. 2(c) EStG 2006, they did not satisfy the additional criteria for integration into the labour market under § 62(2) no. 3(b) EStG 2006. Each of the affected parties in the initial proceedings appealed the denial of their claim to the finance court. The finance court suspended the initial proceedings in accordance with Art. 100(1) first sentence GG and referred to the Federal Constitutional Court the question of whether § 62(2) EStG 2006 was unconstitutional.

After the initiation of the referral proceedings, § 62(2) EStG was subsequently amended effective 1 March 2020 to allow for eligibility in certain cases without the labour market integration criterion. Under the newly added § 62(2) no. 4 EStG, non-German nationals who are not EU-citizens may receive a child allowance if they hold one of the humanitarian residence permits mentioned in no. 2(c) and have resided in Germany on a legal or otherwise allowed basis for at least 15 months. Under this added provision, fulfilment of the criterion for integration into the German labour market is not required.

Key considerations of the Senate:

I. The referral for judicial review is admissible insofar as it concerns § 62(2) no. 3(b) EStG 2006. The referral is inadmissible, however, to the extent that it expressly seeks judicial review of the constitutionality of § 62(2) EStG 2006 generally, insofar as the other types of cases encompassed by this provision do not apply to the cases in the initial proceedings.

II. § 62(2) no. 3(b) EStG 2006 is formally constitutional and falls under the legislative competence of the Federation set out in Art. 105(2) second sentence GG. To the extent that a child allowance under § 31 second sentence EStG serves as family support, rather than as a tax exemption for the minimum income needed for raising children, it constitutes social law legislation rather than tax legislation. The legislative competence of the Federation for the support component of the child allowance nevertheless follows from the focus under tax law on alleviating the burden on families due to the costs associated with raising children.

III. § 62(2) no. 3(b) EStG 2006 is substantively unconstitutional. The provision violates the general guarantee of the right to equality under Art. 3(1) GG.

1. The general guarantee of the right to equality requires that the legislator accord equal treatment to matters that are essentially alike, and unequal treatment to such matters that are essentially different. This applies to both unequal burdens as well as unequal benefits.

Art. 3(1) GG requires that the legislator deciding on tax matters must follow the principle of equitable taxation and the requirement that taxation be based on economic capacity. This applies in particular to income tax law, which must take into consideration the ability of the respective taxpayer to pay. The general guarantee of the right to equality permits the legislator considerable latitude, both regarding the selection of the object to be taxed and the determination of the tax rate. Nevertheless, the principle of equal allocation of tax burdens requires that tax laws take the nature of the object to be taxed into account, and thereby ensure equal taxation among taxpayers. Under the requirement that the burden on affected taxpayers be spread as evenly as possible, the design of the basic tax provision must be structured with equal burdening in mind.

2. Measured against this standard, § 62(2) no. 3(b) EStG 2006 is incompatible with Art. 3(1) GG and is void.

a) This provision results in unequal treatment between two groups of holders of residence permits granted for humanitarian reasons under §§ 23(1), 23a, 24 or 25(3) to (5) of the Residence Act (Aufenthaltsgesetz – AufenthG) who have legally resided or were otherwise allowed to reside at least three years in Germany: Those who are either authorised to work in Germany or are temporarily not working because they are receiving unemployment benefits I or taking parental leave; and those who are not so authorised. Those in the former group are entitled to a child allowance. Those in the latter group, like those in the initial proceedings, are not.

This unequal treatment is not mitigated by the fact that ineligibility for a child allowance is usually compensated by an entitlement to social benefits; even in this case, those who are not entitled to a child allowance can be economically worse off. Those who are ineligible for a child allowance may be subject to considerable financial disadvantages compared to those who receive child allowances, if those affected have their own assets and are therefore – despite not earning an income – not entitled to social benefits. This is because child allowances are not a means-tested benefit, whereas most social benefits, in contrast, require that the recipient have very limited assets.

b) The unequal treatment is not justified.

The goal pursued by the legislator in § 62(2) EStG 2006 is legitimate. The objective of the provision is to limit the payment of a child allowance to only those who are likely to reside in Germany on a long-term basis. A differentiation based upon predicted length of residence can justify, in principle, unequal treatment.

However, the criteria for differentiation selected by the legislator are not suitable for determining who is entitled to a child allowance. In particular, integration into the German labour market (§ 62(2) no. 3(b) EStG 2006) is an unsuitable criterion to reliably determine whether a person will be a long-term resident in Germany, and therefore is unsuitable for achieving the legislative objective.

It may well be in many cases that integration into the German labour market is, as the legislator intended, an indicator that the person in question intends to remain in Germany for the long term. However, the decisive factor for the provision at issue is that the converse conclusion – i.e., that such a prognosis is untenable without gainful employment – is unfounded.

In particular, for persons granted residence permits on humanitarian grounds, a correlation between gainful employment and the probable length of residence appears less plausible than, for example, in cases of targeted migration for the purpose of training and subsequent employment. In the case of most who receive humanitarian residence permits, the length of their residency in Germany depends more on the situation in their respective home countries than on their own life plans.

In addition, failure to meet the labour market integration criterion specified in § 62(2) no. 3(b) EStG 2006 does not necessarily stand in the way of a permanent residence permit if such criterion is not met at the time of the decision to grant such a permit. The granting of a permanent residence permit does require proof that the applicant will have sufficient means of support in Germany (cf. § 9(2) first sentence no. 2 AufenthG). However, as this is assessed in a future-oriented manner, it is not critical that the applicant be currently employed; instead, it is decisive whether it can be expected that the applicant can eventually obtain long-term employment.

The lack of suitability of the criterion in the referred provision as an indication for the length of residency in Germany is also made clear by the fact that, in the majority of cases in the initial proceedings, the decisive factor for the refusal of a child allowance was a brief time gap between the expiry of the plaintiff’s entitlement to unemployment benefits I and their subsequent resumption of employment in a new job. Treating such a short period of receiving unemployment benefits II [i.e., the period of time between the loss of eligibility for unemployment benefits I and the resumption of employment] as an indication of failure to integrate into the German labour market does not do justice to the actual situation of those affected.

The prejudicial effect caused by § 62(2) no. 3(b) in conjunction with § 62(2) no. 2(c) EStG 2006 cannot be justified by the legislator’s power to use typification (Typisierung) in legislation, as the prerequisites for typification are not met. On the contrary, it appears that the legislator instead chose an atypical case as a reference point for the provision.

As for other permissible grounds for differentiation, there is a lack of a recognisable legislative decision for a specific non-fiscal objective of the provision, which is mainly a tax law provision. Insofar as the Federal Finance Court (Bundesfinanzhof) is of the opinion that § 62(2) EStG 2006 also serves the purpose of removing incentives to immigrate, particularly for those with many children (“no immigration into social welfare systems”), a legislative intent to that effect is not discernible.

The same conclusion applies in respect of the economic and labour market interests of the Federal Republic of Germany. It is true that these matters are also part of residence law and thus regulated by ordinary (non-constitutional) law (cf. § 1(1) second sentence AufenthG), and that these could, in principle, be considered as a justification for unequal treatment. However, the interests of the economic and labour market were not clearly pursued in the amendment of § 62(2) EStG 2006.