The Federal Constitutional Court announced that its long-awaited judgment on the Inheritance and Gift Tax Act will be delivered on 17 December 2014. The decision will focus on the question whether the currently applicable beneficial rules regarding the gratuitous transfer of business assets are consistent with the principle of equality in taxation (Art. 3 para. 1 German Federal Constitution). It is expected that the court will disapprove the currently still existing generous possibilities of a tax exemption of 85% or even 100% of the company or share value and will demand new rules from the legislator.
However, it is not clear what legal consequences will result from the expected judgment of the Federal Constitutional Court for the period until new rules enter into force. Basically, the following scenarios are possible:
1. Inconsistency and Continuity Order
In case of tax decisions of the Federal Constitutional Court with regard to inheritance and gift tax and other tax decisions (e.g. wealth tax) it has been practice so far just to criticize such legal regulations deemed to be unconstitutional but to permit their further application until a new law has been passed. The court always set a deadline for the legislator to pass the new legislation within a definite period of time. Against this background it is likely that the Federal Constitutional Court will declare the currently applicable beneficial regulations under the inheritance and gift tax law to be applicable until the end of 2015 or 2016.
2. Repeal ex-tunc
But it is also conceivable that this time the Federal Constitutional Court will not allow the Inheritance and Gift Tax Act to continue to apply for a transition period, but will annul it with effect from the date it entered into force on 1 January 2009. This would affect all transfers made as from the date of judgment or made before but not assessed yet for taxation. But this alternative seems to be very unlikely because it would result in a glaring unequal treatment due to a strict temporal break and thus in another infringement of Art. 3 para. 1 German Federal Constitution.
3. Repael ex-nunc
Also a novelty, nevertheless a conceivable constellation, would be a repeal as from the date of judgment. Then, the legislator could pass a new regulation retroactively to this point of time. The specifics of such a new regulation are hardly predictable.
This results in the following recommendations:
In scenario 1 (continue to apply) and 2 (repeal ex-tunc) there would currently be no need for action. In the first case the taxpayer would have enough time to adjust to a new law and to make, if any, transfers before this new law would enter into force. In scenario 2 transfers would even today be no longer possible by making use of the valid Inheritance and Gift Tax Act. If scenario 3 would occur (repeal ex-nunc), however, immediate action would be required. Because this cannot be excluded, intended transfers should be made in any case until 16 December 2014, in order to benefit from the beneficial rules of §§ 13a, 13b Inheritance and Gift Tax Act. But it is strongly recommended in such cases to arrange for a reservation of revocation in case the Federal Constitutional Court will repeal the Inheritance and Gift Tax Act ex-tunc (scenario 2). Thus, the taxpayer has the opportunity to rescind the donation in a tax-neutral manner in case the legislator will pass a tax-aggravating new law retroactively.
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