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
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
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
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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