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In article no. 98, we reported on constitutional challenges to the trade tax on earnings, the real estate transfer tax as it applies to private homeowners, and the personal income tax to the extent overall tax liability exceeds 50 % of earnings. This article provides an update on the first two constitutional issues.

1. Trade tax on earnings

The ministries of finance of the German states have instructed their respective tax offices to issue trade tax base assessments (Gewerbesteuermessbescheide) on a provisional basis (sec. 165 (1) AO) until the Federal Constitutional Court has delivered its decision (coordinated all-state directives dated 12 December 1997 - BB 1998, 525 and DB 1998, 283). This step was agreed on with the Federal Ministry of Finance. The provisional tax measurement notices will be automatically corrected at the time of the court's subsequent ruling if the tax is held unconstitutional. Since this procedure relates to all tax notices issued regardless of whether the taxpayer has filed an administrative appeal, it is more favourable for taxpayers than a simple suspension of proceedings on appeals filed.

Taxpayers should nevertheless examine their notices carefully to make sure that they in fact state that they are provisional pending the outcome of the case before the Federal Constitutional Court.

The tax authorities do not intend to stay collection of tax assessments. While the proceeding before the Federal Constitutional Court is in principle sufficient to raise serious doubt as to the legality of the tax assessments, the tax authorities argue that the taxpayer's interest in having collection stayed must be weighed against that of the state in collecting the tax. In cases involving basic tax issues which affect large numbers of taxpayers, the tax authorities assert that the state's interest in a reliable flow of tax revenue outweighs that of the taxpayer.

2. Real estate transfer tax

Here as well, the ministries of finance of the German states have instructed their respective tax offices to issue the relevant tax assessment notices on a provisional basis (sec. 165 (1) AO) until the Federal Constitutional Court has delivered its decision (coordinated all-state directives dated 6 March 1998 - BStBl I 1998, 246). Again, requests for a stay of collection of the tax will be rejected.

3. Significance of the administrative action

The action taken by the state tax authorities is motivated largely by administrative expediency. Issuance of tax assessment notices on a provisional basis permits the assessment process to go forward and relieves taxpayers of the necessity of filing appeals. If, as the tax authorities expect, the constitutional challenges are later rejected by the Federal Constitutional Court, no further action on their part will be required. Should the court rule in the taxpayer's favour, the tax authorities will then adjust the provisional assessments accordingly. In this event, the action taken by the tax authorities also serves the cause of distributive justice because all taxpayers whose assessments were pending as of the date of the new directives will benefit, not just those who filed appeals.

Disclaimer and Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. We in particular insist that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.