Supplementary taxes on income tax and their procedural peculiarities

Income taxes and their surcharge taxes

The German income taxes – corporate income tax and income tax – are both subject to “taxes assessed based on income tax (surcharge taxes)” (Sect. 51a(1) sent. 1 of the Income Tax Act). The Solidarity Surcharge is levied on both types of tax pursuant to Sect. 2 of the Act governing the Solidarity Surcharge. Corporations, associations of persons, and estates that are subject to corporate income tax under Sect. 1 or Sect. 2 of the Corporate Income Tax Act are in any case liable for the surcharge (Sect.  2 No. 3 of the Act governing the Solidarity Surcharge). Natural persons who are subject to income tax pursuant to Sect. 1 of the Income Tax Act or Sect. 2 of the Foreign Transactions Tax Act (non-resident, extended non-resident, or resident taxation) are also subject to the tax by virtue of Sect. 2 no. 1, 2 of the Act governing the Solidarity Surcharge), but are largely protected from an actual “tax burden” in this area by comparatively high exemption thresholds (Sect. 3(3) sent. 1 of the Act governing the Solidarity Surcharge) and mitigation zones (Sect. 4 sent. 2 of the Act governing the Solidarity Surcharge). In the case of corporations, however (as well as in the case of the flat-rate withholding tax under Sect. 32d(3, 4) of the Income Tax Act, Sect. 3(3) sent. 2 of the Act governing the Solidarity Surcharge), the solidarity surcharge is levied in all cases. Furthermore, its constitutional admissibility has been clarified by a ruling of the Federal Constitutional Court (Federal Constitutional Court, Judgement dated March 26, 2025, file number 2 BvR 1505/20). 

In addition, church tax is levied as a surcharge on income tax for church members. Its rate varies between 8 percent and 9 percent of the income tax to be assessed, depending on the federal state of residence. In terms of its economic burden (regarding the tax advisor’s corresponding duty to advise, Federal Court of Justice, Judgement dated May 18, 2006, file number IX ZR 53/05), it is mitigated by the unlimited special expense deduction granted under Sect. 10(1) no. 4 of the Income Tax Act, so that the effective tax burden is significantly lower than the nominal rates. 

In addition, a modified tax base is applied: In all cases, child allowances under Sect. 32(6) of the Income Tax Act must be applied (Sect. 51a(2) sent. 1 of the Income Tax Act; in this respect, see Sect. 3(2) of the Act governing the Solidarity Surcharge). The partial tax exemption under the partial income method is not granted (Sect. 51a(2) second sent. of the Income Tax Act). Nor is there a reduction in the income tax to be assessed through the tax credit under Sect. 35 of the Income Tax Act for trade tax suffered (Sect. 51a(2) third sent. of the Income Tax Act).

Lawsuit challenging the obligation to pay church tax

In this context, the tax courts must occasionally also rule on proceedings concerning church tax. The procedural law governing income tax generally applies here as well (Sect. 51a(1) sent. 1 of the Income Tax Act; resembles Sect. 1(2) of the Act governing the Solidarity Surcharge). In some cases, these proceedings relate to the “knock-on effects” of church tax on income tax, such as the details of the deduction as a special expense (Federal Tax Court, Judgement dated March 16, 2021, file number X R 23/19) or the rule regarding the refund of church tax as a return of special expenses (Sect. 10(4b) sent. 3 of the Income Tax Act; Lower Tax Court of Münster, judgement dated December 10, 2024, file number 1 K 3869/18 E). In this respect, there are no peculiarities to be taken into account.

However, if the case concerns an action against the church tax assessment or the church tax prepayment notice (Sect. 51a(4) of the Income Tax Act) itself (Section 33(1) no. 4 of the Tax Court Code (“Finanzgerichtsordnung”)), specific issues arise, as the Federal Tax Court has once again ruled in its judgement of October 30, 2025 (file number X R 28/22): For example, if the question is whether a natural person is liable for tax, the relevant church tax laws of the federal states must be interpreted. The Federal Tax Court can review these findings of the tax court only to a limited extent on appeal. The interpretation of the church tax law itself may be subject to review as a violation of state law pursuant to Sect. 118(1) sent. 2 of the Tax Court Code in conjunction with Sect. 33(1) no. 4 of the Tax Court Code (margin no. 34). However, the provisions governing admission to the church (and the “re-admission” at issue in the case at hand) fall under the statutory rights of the relevant church community and are neither federal law nor state law. Consequently, the Federal Tax Court’s standard of review is limited to “admissible and well-founded grounds for appeal” (Sect. 118(2) of the Tax Court Code). Otherwise, the findings of the tax court on this issue are binding on the Federal Tax Court (margin no. 38 et seqq.).

However, the findings in this area were too incomplete for the Federal Tax Court in the case of the plaintiff, whose history regarding his church membership was marked by many gaps and peculiarities. The remand to the lower tax court for further hearing and decision (Sect. 126(3) sent. 1 no. 2 of the Tax Court Code) was thus the only appropriate course of action.