Occupying the Federal Constitutional Court: are the inheritance tax benefits for business assets unconstitutional? © Matthias Cantow CC 3.0 / wikipedia.de
A ruling by the Federal Constitutional Court (BVerfG) is still expected in 2014. According to the Bundesfinanzhof (BFH), the exemptions in the Inheritance Tax Act granted for business assets are unconstitutional. For this reason, the tax authorities have ordered that, for all open tax cases with a reference date from 1 January 2009 onwards, the tax may only be assessed provisionally in the tax assessment notices. The BFH has asked the Federal Constitutional Court to decide (decision of 27 September 2012, Az. II R 9/11) whether the inheritance tax benefits for business assets are compatible with the principle of equality under the Basic Law, given that no such exemptions exist for private assets. The BVerfG's final decision is still expected this year. Many people are now worried about business assets that have already been transferred under the new benefit: what can be expected? What consequences could the ruling have? Is there a short-term need for action before the Federal Constitutional Court announces its decision? What applies to transfers of business assets that have already taken place?
- Tax assessment notices that have become final and binding. Tax assessment notices that have already become final and binding and can therefore no longer be amended remain in force together with the benefits.
- Tax assessment notices with a reservation note. Tax assessment notices provisionally issued by the tax authorities (§ 164 AO) – or tax assessment notices that have been issued provisionally on this point (§ 165 AO) – can still be amended in full following the ruling in respect of business assets already transferred, even after the court's decision.
However, if the current inheritance tax law is declared unconstitutional, the court can declare the provisions of the act null and void. In that case, all provisional tax assessments by the tax office would have to be reversed, and at the same time no new tax could be assessed because there would be no legally valid statute. The legislator would not be able to retroactively enact a new statutory rule to the detriment of taxpayers, as this is not permitted under constitutional law = protection of legitimate expectations. What applies if the Federal Constitutional Court considers the current inheritance tax law to be constitutional? If the BVerfG considers the inheritance tax act currently in force to be constitutional, the exemption rules for business assets may, as a logical consequence, continue to be used. However: notices that have been issued subject to subsequent review do not automatically become final as a result. Taxpayers are therefore advised to file an application for a declaration of finality for such notices, since these would then no longer be amendable on any point. What about cases that have already been submitted to the tax office but have not yet been assessed, i.e. where no tax assessment notice has yet been issued? If the BVerfG declares the current law to be constitutional, the cases will be assessed under the applicable exemption rules for business assets. If the current inheritance tax law is in fact declared null and void, the cases may no longer be assessed by the tax office, which would mean that no tax could be assessed in those cases. However, it is more likely that the BVerfG will declare the current law to be incompatible with the principle of equality and that the German legislator will be required to create a constitutional new rule by a specified date. If this is the solution, all tax assessments will remain provisional.
Perhaps the ruling will be handed down here: view into the courtroom of the Federal Constitutional Court at its temporary seat, © Erol Pohlreich, CC 2.0 / flickr.com
How will the BVerfG decide and what can possibly still be done before the ruling is issued? Unfortunately, no one currently knows the answer. However, we have considered the court's possible decisions and prepared recommendations for action. The BVerfG could declare the inheritance tax law to be incompatible with the principle of equality. In our view, this is not entirely unlikely. In that case, the legislator would have to enact a revised statute within a certain period. Notices that have been issued subject to a reservation do not automatically become final. However, there is no reason for concern: any amendment of tax assessment notices already issued to the detriment of the taxpayer would likewise not be permitted. Our recommendation: please apply to the tax office for the notice to be declared final. What about (open) cases that, prior to the ruling, have already been submitted to the tax office but have not yet been assessed, i.e. where no tax assessment notice has yet been issued? If the current law were declared to be constitutional, the exemption rules for business assets would remain unchanged; if the court rules that the existing law continues to apply until a new decision has been made, the current law would likewise remain in force for that period. If, however, the BVerfG decides that the current law is null and void, the open cases could no longer be assessed. As a logical consequence, these cases would remain tax-free. If the inheritance tax law currently in force is declared null and void: what would apply to cases occurring after the BVerfG's ruling but before a new inheritance tax act enters into force? In that case it would be possible to transfer business assets entirely tax-free. However, we consider it more likely that the court will merely rule that the current inheritance tax act is incompatible with the Basic Law and will allow the old law to continue to apply until a new rule is enacted. This would mean that, until a new statute enters into force, business assets could still be transferred under the exemption rules currently in force. Final assessments could therefore only be carried out for as long as the old law is in force. What disadvantages are to be feared for taxpayers? In general: amendments to final notices are no longer possible. It is therefore best, in all cases, to apply to have the notices issued as final. Amendments to provisional notices to the disadvantage of the taxpayer are not possible. Only amendments in favour of the taxpayer are permitted. Accordingly, if a new statutory rule is enacted, no retroactive disadvantages can arise for the taxpayer in respect of transfers made in the interim. Anyone considering the transfer of business assets should do so, if possible, before the BVerfG's ruling, since the exemption rules can still be used at present. However, time is running out and one should act quickly. Overall, disadvantages could only arise for the taxpayer if the court – which we consider rather unlikely – were to declare individual aspects of the exemption rules currently in force to be null and void.
Frequently asked questions
Frequently asked questions
Why is the Federal Constitutional Court reviewing the relief rules for business assets?
The BFH considers the inheritance tax preferences for business assets to be unconstitutional and referred the matter to the Federal Constitutional Court by order of 27 September 2012 (Az. II R 9/11). Doubts arise above all regarding compatibility with the principle of equality, as no comparable relief exists for private assets. Pending the decision, the tax authorities are assessing inheritance tax only on a provisional basis for valuation dates from 1 January 2009 onwards.
What happens to final inheritance tax assessments if the BVerfG strikes down the tax benefits?
Final and no longer amendable tax assessments remain unchanged, even if the court declares the applicable law unconstitutional. The exemptions originally granted for business assets are not revoked in such cases. Therefore, completed transfers face no risk of subsequent disadvantages.
What are the implications of a court ruling for assessments issued subject to review?
Assessments issued under § 164 or § 165 AO do not automatically become final, even if the BVerfG declares the applicable law constitutional. They may still be amended, but only in favor of the taxpayer, since retroactive tightening is inadmissible on grounds of protecting legitimate expectations. It is therefore advisable to file a request with the tax office to have the assessment declared final.
What applies to inheritance tax cases not yet assessed after the ruling?
If the BVerfG declares the current law constitutional, assessment proceeds under the existing relief rules. In the event of a declaration of nullity, the tax office would no longer be permitted to assess these cases, meaning no inheritance tax could be levied. More likely, however, is a declaration of incompatibility with a continued-application order, so that the previous law remains applicable until a new regulation is enacted.
Should business assets be transferred before the BVerfG ruling?
Anyone planning to transfer business assets should ideally do so before the ruling in order to take advantage of the current relief rules. Retroactive disadvantages for interim transfers are not permissible under constitutional law. Drawbacks would only arise in the unlikely event that the court declares specific relief rules void on an individual basis.