German Federal Fiscal Court confirms the Constitutionality of the Solidarity Surcharge

The solidarity surcharge has been levied to finance German reunification since 1995 to the present day. The legal basis is the Solidarity Surcharge Act 1995 (SolZG 1995). In addition, both Solidarity Pact I (1994 to 2004) and Solidarity Pact II (2005 to 2019) provided for further fiscal measures in connection with reunification.

The Act on the Repatriation of the Solidarity Surcharge 1995 of 2019 does continue the surcharge. Since 2021, however, it has only been levied if the annual income tax for single taxpayers exceeds EUR 16,956 or EUR 33,912 for joint taxpayers; the solidarity surcharge is, however, always levied on both income from capital assets taxed at a separate tax rate and corporate income tax.

So far, the German Federal Fiscal Court has ruled that the solidarity surcharge is constitutional against the background of the federal government’s continuing financial needs as a result of reunification. In the current proceedings, however, it had to be clarified whether the levying of the solidarity surcharge is still constitutional in 2020 and 2021 after the expiry of Solidarity Pact II on December 31, 2019. This was confirmed by the German Federal Fiscal Court in its ruling of January 17, 2023 (Ref. IX R 15/20).

German Federal Fiscal Court

The solidarity surcharge is a supplementary levy on income tax and corporation income tax within the meaning of Article 106 (1) No. 6 of the German Constitution, whose levying until 2019 meets the constitutional requirements. In the opinion of the German Federal Fiscal Court, it is also justified for the years 2020 and 2021, as there continues to be a special reunification-related financial burden on the federal government - for example, in pension insurance, in the labor market and with regard to special benefits for the eastern German states. This is underpinned by the fact that the financial constitutional integration of the new federal states is a “generational task” that can sometimes span a period of around 30 years. Against this background, the levying of a supplementary levy over a period of 26 or 27 years is not (yet) objectionable. However, at the end of this period, the legislator may be constitutionally required to review whether the original decision to levy the supplementary levy should be maintained under the now changed circumstances or whether the supplementary levy should be abolished.

The assumption of a continuing justification for the supplementary levy corresponds to the consideration of a declining financial requirement underlying the Act on the Repatriation of the Solidarity Surcharge 1995. According to the legislator’s assessment, the need for funds should decrease considerably by 2019, but not yet be completely eliminated. Against this background, the gradual reduction of the solidarity surcharge from 2021 and the abolition of the supplementary levy at a later date, as envisaged by the legislator, is the logical reaction of the tax legislator. It is sufficiently clear from the Act on the Repatriation of the Solidarity Surcharge 1995 and the preceding legislative process that the legislator does not intend to levy the solidarity surcharge indefinitely, but only for a transitional period. With this declaration of intent, the legislator remains within the (broad) assessment framework to which it is entitled.

Moreover, the German Federal Fiscal Court does not recognize any mandatory legal binding of the solidarity surcharge to the Solidarity Pact II, which is why the expiration of the Solidarity Pact II on December 31, 2019, cannot have any decisive effect on the continued existence of the solidarity surcharge.

The extent to which other reasons, such as the Corona pandemic, the Ukraine war or the financial needs required to combat climate change, may justify the levying of a solidarity surcharge in 2020 and 2021 does not currently require clarification, as the original legislative purpose for the introduction of the solidarity surcharge in 2020 and 2012 has not yet ceased to apply.

The levying of the solidarity surcharge also does not violate the general principle of equality (Article 3 (1) of the German Constitution). This is because the legislature can treat substantially equal things equally and substantially unequal things unequally. In principle, it is up to the legislature to select those circumstances which it assigns the same legal consequences and thus qualifies as “substantially the same”. At least in the selection of the tax object as well as in the determination of the tax rate, the legislator has a wide scope of decision in this respect. For example, it may provide for exemptions from the tax if it otherwise fears undesirable effects that would be detrimental to the common good if the tax were levied without restriction. Thus, it is justified for sociopolitical reasons to levy the solidarity surcharge only on top incomes as of 2021.

The German Federal Fiscal Court thus also sees a sufficient constitutional basis for the solidarity surcharge for the assessment periods 2020 and 2021. The appeal proceedings pursued by the taxpayer therefore remain unsuccessful. If the taxpayer wishes to pursue the case further, he or she must file a constitutional complaint with the German Federal Constitutional Court.

Provisional Assessment

The tax authorities issue all assessments of the solidarity surcharge for assessment periods from 2005 onwards with a corresponding note of provisional effect (§ 165 (1) sentence 2 no. 3 of the German Fiscal Code) with regard to the constitutionality of the SolZG 1995. This also covers the question of whether the continued levying of a solidarity surcharge after the expiry of the Solidarity Pact II on December 31, 2019 is constitutional for the assessment periods from 2020.

The provisional note means that the respective tax case is still open with regard to the constitutionality of the SolZG 1995, which regularly renders individual appeal proceedings in this regard unnecessary. As a rule, the assessment of the solidarity surcharge is automatically changed by the tax office as soon as the German Federal Constitutional Court has ruled on the constitutionality of the SolZG 1995. If, in addition to the question of constitutionality to be clarified, there are also factual or legal ambiguities regarding the solidarity surcharge in a tax case, an appeal procedure is unavoidable, i.e. an objection must be filed. However, this should be the absolute exception.

It remains to be seen whether and to what extent the tax authorities will adjust the provisional note on the constitutionality of the solidarity surcharge based on the current ruling by the German Federal Fiscal Court.