The Federal Constitutional Court has dismissed two cases concerning the constitutionality of a specific provision under income tax law. Specifically, the dispute centred on whether employers who leave a pay-as-you-go supplementary pension scheme are obliged to pay a flat-rate income tax of 15 per cent on so-called ‘equivalent payments’. In this context, the employer itself, not the employee, is deemed to be liable for this tax.
What are payments in kind?
If an employer terminates membership of a pay-as-you-go supplementary pension scheme, they are in many cases required to make a compensation payment. This so-called ‘equivalent payment’ is intended to ensure that the pension entitlements of the employees concerned remain covered. For tax purposes, the legislator treats such payments as special payments within the meaning of the Income Tax Act, which triggers a flat-rate payroll tax of 15 per cent.
Why did the Federal Fiscal Court have constitutional concerns?
The Sixth Chamber of the Federal Fiscal Court considered this provision to be constitutionally questionable in two cases relating to the year 2008. It stayed the proceedings pending before it and referred the matter to the Federal Constitutional Court for review. The key issue was whether the flat-rate tax in this form is compatible with the Basic Law.
Why have the proceedings now been dropped?
The Federal Constitutional Court did not rule on the substance of the referrals from the Federal Fiscal Court, but dismissed the proceedings on procedural grounds. The judge-rapporteur responsible pointed out that the referral did not satisfy the legal requirements of Article 100(1) of the Basic Law. According to this provision, a referring court must clearly demonstrate that the provision at issue is in fact relevant to the decision in the main proceedings.
This was lacking here for two reasons. Firstly, the Federal Fiscal Court (BFH) and the parties involved had not sufficiently clarified whether the specific payments actually met the statutory requirements and constituted taxable income for the employees. Secondly, there was no comprehensible justification for how the employer’s total payment could be allocated proportionally to the individual employees. The BFH subsequently revoked its decisions to refer the case and to stay proceedings. The Federal Constitutional Court then discontinued the proceedings.
What does this mean in practice?
The substantive question of whether the flat-rate payroll tax on payments in lieu is constitutional therefore remains unresolved. The Federal Constitutional Court in Karlsruhe has not provided a definitive ruling on the matter. Employers affected by such payments, or those wishing to leave a supplementary pension scheme in future, should carefully assess the tax implications. The regulation remains in force unchanged until further notice.
Anyone who finds themselves in a similar situation or is unsure about the tax treatment of payments in lieu should seek tax advice. The rulings of the Federal Constitutional Court bear the reference numbers 2 BvL 7/14 and 2 BvL 8/14 and are dated 5 August 2026.
Source: Haufe: Tax
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