Judgment Federal Constitutional Court On Inheritance And Gift Tax Act

Author:Dr. Andreas Richter and Maximilian Haag
Profession:P+P Pöllath + Partners

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 or 2016.

  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...

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