German Constitutional Court Issues Ruling On Retroactivity Of Tax Laws


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...

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