Typical silent partnership or atypical silent partnership? Co-entrepreneur yes or no?

Transitional issues in tax law regime changes  

Frictions during the transition from one tax regime to another frequently arise in income tax law. Various techniques are available to the legislature to address this – in particular, the old status can be preserved through “grandfathering” (as in the transition to the withholding tax under Sect. 32d of the Income Tax Act, Sect. 52(28) sent. 11 of the Income Tax Act). It is also conceivable to convert existing holdings into new holdings by means of “fictitious sale and acquisition” – as was the case with the transition to non-transparent taxation of investment funds at the turn of the year 2017/2018 (Sect. 56 of the Investment Fund Tax Act; see most recently Federal Tax Court, judgment dated November 25, 2025, file number VIII R 15/22).

However, transitional issues arising from changes in the tax system are not limited to income tax law. The extension of certain real estate transfer tax holding periods from five to ten years by the Act amending the Real Estate Transfer Tax Act of May 12, 2021, has also, through Sect. 23(18, 24) of the Real Estate Transfer Tax Act, brought about new transition rules which must now be interpreted by the tax courts (most recently lower tax court of Düsseldorf, judgment dated Oct. 8, 2025, file number 11 K 1987/25; review pending at the Federal Tax Court, file number II R 44/25; in this respect contrary to the view of the tax administration in Decrees of the Supreme Tax Authorities of the Federal States of March 5, 2024, Federal Tax Gazette I 2024, p. 410, margin no. 123). Similarly, these questions arise in connection with the change in the inheritance tax treatment of business assets (including Sect. 13a, 13b of the Inheritance and Gift Tax Act), which was brought about by the 2014 ruling of the Federal Constitutional Court (Federal Constitutional Court, judgment dated Dec. 17, 2014, file number 1 BvL 21/12). 

In response to the ruling, the legislature made changes to the Inheritance and Gift Tax Act, including through Sect. 13b(10) of the Inheritance and Gift Tax Act as amended by the 2016 Amendment Act. These amendments took effect retroactively as of July 1, 2016, and were also applicable to the assessment date of July 24, 2016, which the plaintiff in case II R 7/23 cited. Sect. 37(12) sent. 1 of the Inheritance and Gift Tax Act provides in this regard that “Sections 10, 13a through 13d, 19a, 28, and 28a, as amended by Article 1 of the Act of November 4, 2016 (Federal Tax Gazette I 2016, p. 2464) … apply to acquisitions” for which “the tax arises after June 30, 2016.” The accrual of tax (Sect. 38 of the General Tax Code) is in turn governed – in the case of an inter vivos gift, as with the plaintiff – by Sect. 9(1) no. 2 of the Inheritance and Gift Tax Act: It coincides with the date of execution of the gift, i.e., July 24, 2016.

Constitutional issues regarding retroactivity

This raised the issue of retroactively applicable onerous laws in tax law for the plaintiff. According to the established case law of the Federal Constitutional Court, the fundamental prohibition of retroactive onerous laws is based on the principles of legal certainty and the protection of legitimate expectations (Art. 2(1) in conjunction with Art. 20(3) of the Basic Law). It protects reliance on the reliability and predictability of the legal order established under the Basic Law and the rights acquired on its basis (see Federal Constitutional Court, judgment dated April 10, 2018, file number 1 BvR 1236/11, Federal Tax Gazette II 2018, p. 303, margin no. 134, regarding Sect. 7 sent. 2 of the Trade Tax Act). 

Central to the constitutional assessment is the distinction between quasi-retroactivity and genuine retroactivity (Federal Constitutional Court, judgment dated March 25, 2021, file number 2 BvL 1/11, margin no. 51 et seqq.): 

• Where the adverse legal consequences of a provision arise only after its promulgation but are triggered by facts that have already occurred (“factual retroactivity”), there is non-genuine retroactivity (“unechte Rückwirkung”). Such quasi-retroactivity is not fundamentally impermissible. In particular, the constitutional protection of legitimate expectations does not extend so far as to shield citizens from every disappointment. Unless there are special circumstances warranting protection, the mere general expectation that the applicable law will remain unchanged in the future does not enjoy any special constitutional protection.
• A legal norm has genuine retroactive effect (“echte Rückwirkung”) if its legal consequences are intended to apply with adverse effect to facts already completed prior to the date of its promulgation (“retroactive application of legal consequences”). In tax law, genuine retroactive effect exists only if the legislature retroactively modifies a tax liability that has already arisen. This is generally impermissible under constitutional law.

The plaintiff in this case fell into the latter category: With regard to the gift made on July 24, 2016, which is at issue in this case, the provision of Sect. 37(12) sent. 1 of the Inheritance and Gift Tax Act means that the legislature retroactively amended a tax liability that had already arisen, since the new provision for valuing the gift under Sect. 13b(10) of the Inheritance and Gift Tax Act, as amended by of the Act to amend the Inheritance and Gift Tax Act 2016, applies for the first time to gifts already made at the time the provision was enacted.

This required a special constitutional justification. It is recognized in this regard that the prohibition on retroactivity finds not only its roots but also its limit in the principle of protection of legitimate expectations. It does not apply where no reliance on the continued validity of the applicable law could have been formed, or where reliance on a specific legal situation was not objectively justified and therefore not worthy of protection (e.g. Federal Constitutional Court, judgment dated Dec. 17, 2013, file number 1 BvL 5/08, margin no. 64).

When does constitutionally protected reliance arise?

The question of whether constitutionally protected reliance exists requires a very close examination of the legislative process: From the day of the final resolution by the German parliament (“Bundestag”; within the meaning of Art. 77(1) sent. 1 of the Basic Law) on a bill, the taxpayer can no longer rely on the continued existence of the previous regulation but must, from that point on, expect the promulgation and entry into force of the new regulation. However, it is not necessary for the last remaining uncertainty regarding the “whether” and “how” of the new regulation to have been eliminated: Despite the Federal Council`s (“Bundesrat”) powers of participation, which can influence both the content and the enactment of the law as a whole, reliance on the continued validity of the legal situation is already destroyed at this point.

With regard to the “Act to amend the Inheritance and Gift Tax Act 2016”, the plaintiff, in the opinion of the Federal Tax Court, could therefore no longer have a legitimate expectation of the continued validity of the legal situation as of the resolution by parliament of June 24, 2016. Nor could the convening of the Mediation Committee (“Vermittlungsausschuss”) by the Federal Council on July 8, 2016 (Art. 77(2) sent. 1 of the Basic Law) change this. Nor could the order of continued validity issued by the Federal Constitutional Court in its judgment of December 17, 2014 (file number 1 BvL 21/12, Federal Tax Gazette II 2015, p. 50) create such a legitimate expectation: This does not give rise to a legitimate expectation that the legislature may not enact new regulations with retroactive effect.

Similar issues also arise in connection with other legislative proposals – and will certainly resurface given the political volatility of tax legislation. Most recently, the First Chamber (“erster Senat”) of the Federal Tax Court (Federal Tax Court, judgment dated March 26, 2025, file number I R 5/24 (I R 99/15)) decided regarding Sect. 4(1) sent. 4 of the Income Tax Act in the context of income tax relief: The retroactive effect established there – also a “genuine” one – was, in the opinion of the Federal Tax Court, (likewise) justified.