The Federal Constitutional Court [Bundesverfassungsgericht,
BVerfG] must decide whether or not the legislator is allowed
to breach tax treaties with other countries. The Federal Fiscal
Court [Bundesfinanzhof, BFH] is of the conviction that a
tax norm is unconstitutional if it changes a double taxation
agreement (DTA), and has passed on corresponding proceedings to
Federal Constitutional Court by referral order (docket no.: I R
66/09). This could now overturn numerous similar tax laws which
likewise alter DTAs to the detriment of the taxpayer (so-called
In the current proceedings, a taxpayer resident in Germany was
unable to prove that his employee activities rendered in Turkey had
been duly and properly taxed there. The tax office and the fiscal
court of first instance therefore treated the income as taxable in
Germany. The DTA with Turkey, however, stipulates that this income
is tax-exempt in Germany. According to the old DTA, which was still
applicable to this matter, this is the case irrespective of whether
or not the income was duly and properly declared in Turkey. A norm
of income tax law, in contrast, stipulates that the taxpayer is not
exempt from German taxation in the event of a failure to prove the
due and proper declaration of the income abroad.
The Federal Fiscal Court considers this norm to be
unconstitutional for two reasons. To begin with, it only applies to
income of an employee. Since there is no material reason for such
limitation, the provision is unconstitutional as it violates the
principle of equal treatment of Article 3 German Constitution
[Grundgesetz, GG]. Secondly, and this is of fundamental
importance, the German legislator is also obliged to observe the
general principle of international law that contracts must be
observed (pacta sunt servanda). The decree of a norm which
unilaterally alters a DTA constitutes a violation of the
constitutional regime, which unjustly impairs the taxpayer in its
general freedom of action (Article 2 I GG in conjunction with Art.
20 III GG).
An exception can only exist if the legislator can plead a
sufficient justification basis. In these proceedings no such
justification basis lies in the lacking proof of taxation in
Turkey. According to the DTA, the exemption from taxes in Germany
was agreed specifically irrespective of any due and proper taxation
in Turkey. Germany could have terminated the DTA and have made the
tax exemption dependent upon the due and proper declaration of the
income in the foreign state in which the activity was conducted
– as has also now happened with the current DTA with
The Federal Fiscal Court is therewith amending its established
jurisprudence of many years. Should the Federal Constitutional
Court rightly share its opinion, then countless similar treaty
overrides will doubtlessly come under the scrutiny of
constitutional law; in the draft of the Annual Tax Act
[Jahressteuergesetz] 2013 another treaty override is
envisaged. The legislator can then reckon with considerable cleanup
operations. Irrespective of this, the judgement could help to
increase the acceptance of tax norms and the taxpayers' trust
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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