On December 17, 2013, the German Constitutional Court
(Bundesverfassungsgericht) issued a decision in respect to a tax
law that had retroactive effect when it was enacted.
International tax observers are always concerned about the
practice of the German legislature to enact tax laws with
retroactive effect. Under German law, a distinction must be made
between true retroactive effect and pseudo retroactive effect. The
latter is permitted and applies when a legislator changes the law
before a relevant tax period is completed. With respect to the
income and corporation tax, the tax period is completed at the
calendar year-end. Consequently, changes to the tax law during a
calendar year (in many cases at the end of a calendar year) that
will be effective as of the beginning of the same year are
permitted under constitutional law and are referred to as
"pseudo retroactive." One may well dispute whether such
changes are in fact pseudo retroactive, but it has been the
longtime position of the German Constitutional Court.
In cases where the tax year is already completed, a retroactive
change to the tax law is generally not permitted and is referred to
as "true retroactive." However, there are some exceptions
to this rule. In the past, the legislature enacted laws
retroactively and argued that the new law does not change the legal
position of the taxpayer because the new law is only a
clarification of existing law. Thus, it has retroactive effect and
should be applicable to all open cases.
The Constitutional Court has now taken the position that the
unclear wording of the existing law does not justify the
retroactive implementation of a new law because such wording can be
interpreted by the courts. Thus, there is no need for the
legislature to protect the public from the existing law. Further,
the legislature has no right to determine how a law is to be
interpreted simply by enacting a new law retroactively. It may,
however, change the law going forward and clarify the content.
Through this decision, the Constitutional Court narrowed the
cases where the implementation of law with retroactive effect is
permitted under German law.
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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