Retroactive Application of Tax Laws

International tax law  >  Retroactive Application of Tax Laws

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Judgment of the Hessian Finance Court on the Taxation of a Severance Payment

Tax laws can have a retroactive effect following a decision by the Hessian Finance Court on November 21, 2023 (Case No.: 10 K 1421/21). Accordingly, a severance payment can be taxed in Germany since 2017, even if the taxpayer has since moved their residence abroad to an EU country.

If an employee received a severance payment due to the termination of their employment and moved their residence abroad, the severance payment could be tax-free in Germany, provided that at the time of receiving the severance, the taxpayer resided in a country which, according to a double taxation agreement, has the primary right to tax. However, due to a change in the law effective from January 1, 2017, it is now possible for a severance payment related to a specific occasion to also be taxed in Germany, according to the law firm MTR Legal Lawyers, which advises on international tax law, among other areas.

Residence Abroad at the Time of Severance Payment

The finance court in Kassel has now decided that tax laws can also apply retroactively. In the underlying case, an employee had amicably ended her employment relationship in 2016. In compensation, the employer agreed to pay a severance. At the woman’s request, however, the severance was not paid out until 2017. By then, the woman had moved her residence to Malta.

This did not prevent the responsible tax office from considering the severance payment in the income tax assessment.

Plaintiff Invokes Protection of Legitimate Expectations

The woman objected, arguing that the amended regulation of § 50d para. 12 sentence 1 EStG (Income Tax Act) did not exist at the time of the severance agreement and her move to Malta, nor was it foreseeable. She argued that she could not have anticipated such a change in the law and could rely on the protection of legitimate expectations.

Her lawsuit was unsuccessful at the Hessian Finance Court. The court rejected the objection of unlawful retroactivity. In tax law, an unlawful retroactive effect can only be assumed if a tax debt that has already arisen is subsequently amended by the legislator. However, legislative changes that only take effect in the subsequent tax period are generally permissible, according to the court.

Revision Pending at the Federal Court of Justice

Moreover, changes in income tax law typically occur with reference to the assessment period. Therefore, taxpayers cannot, in principle, rely on the protection of legitimate expectations for the continued application of an old regulation, the Hessian Finance Court further explained. In the present case, it was also pointed out that the plaintiff could have had her severance paid out in 2016, which might have resulted in it being tax-free in Germany.

The judgment is not yet legally binding; a revision has been filed with the Federal Court of Justice under file number VI R 3/24.

MTR Legal Lawyers advises on international tax law.

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