Solidarity surcharge: Constitutional Court advises on legality

Almost four years ago, the solidarity surcharge disappeared from the payslips of most German citizens. But higher earners and companies are still being asked to pay. A constitutional complaint against the soli, which was introduced to finance German unity and has been controversial for decades, is now ending up at the Federal Constitutional Court in Karlsruhe. If the court were to abolish the levy, it would probably present the next federal government with another major challenge. What it’s about:

The solos are levied as a surcharge on income and corporation tax as well as capital gains. After there had already been a temporary predecessor in 1991/1992, the surcharge was introduced indefinitely in 1995, according to the Federal Ministry of Finance “against the background of the ongoing financing burden on the federal government in connection with the establishment of German unity”. However, like all tax revenue, the money is not earmarked and flows into the federal budget.

By the end of 2020, almost all citizens and companies in East and West had to pay the solidarity surcharge. Since 2021, only higher earners, companies and investors have had to pay it: for 90 percent of taxpayers it was abolished as part of the “Law on the Repatriation of the Solidarity Surcharge 1995”, and at least partially for a further 6.5 percent.

According to the German Economic Institute, around six million people recently paid the solidarity and around 600,000 corporations.

The constitutional complaint from two former and four current FDP members of the Bundestag will be heard in Karlsruhe on Tuesday – including the parliamentary group leader Christian Dürr and the former finance state secretaries Florian Toncar and Katja Hessel. Toncar and Hessel also resigned from their positions following the dismissal of FDP leader Christian Lindner from the office of Federal Finance Minister last week. The FDP politicians had sued before the Liberals came into government.

The complainants believe that the award became unconstitutional when the so-called Solidarity Pact II expired at the end of 2019. They also criticize that recipients of different incomes are treated unequally by the law to reduce the solidarity surcharge. A verdict is usually only made a few months later.

The solidarity pact was a transfer from the federal and state governments to the East German federal states. The Solidarity Pact I came into force in 1995 and was replaced by the Solidarity Pact II in 2005. The pact consisted of two baskets. The first was intended to expand the infrastructure in East Germany and strengthen the financial strength of the municipalities. In the second, money was made available for economic development. The Solidarity Pact II expired at the end of 2019.

It is not the first time that a high German court has dealt with the tax. In January 2023, the Federal Finance Court (BFH) in Munich rejected a lawsuit against the solidarity surcharge and declared it constitutional. The plaintiffs – a couple from Aschaffenburg – together with the Taxpayers’ Association had demanded submission to the Federal Constitutional Court. According to the BFH ruling, the federal government clearly demonstrated that reunification would continue to cause increased financial requirements, even if the solidarity pacts to finance the uniform burdens had expired.

The decision of the Karlsruhe judges could have a major impact on the federal budget. The federal government has firmly budgeted solidarity income of 12.75 billion euros for the coming year. If the Constitutional Court overturns the award, this would significantly increase the hole in the budget for 2025. But it could get even worse: The Senate could decide that the state has to pay back income from the solidarity surcharge from previous years. That would be around 65 billion euros since 2020. The next federal government would probably have to deal with the consequences.

Abolishing the solidarity surcharge could provide relief for companies. According to experts, companies in Germany could save almost 65 billion euros. This emerges from a calculation by the employer-related Institute of the German Economy (IW). Business associations have been calling for the tax to be abolished for years.