BVerfG on the Solidarity Surcharge

The BVerfG solidarity surcharge ruling in brief

In the BVerfG solidarity surcharge ruling of 26 March 2025 (2 BvR 1505/20), the Second Senate of the Federal Constitutional Court rejected a constitutional complaint against the continued levying of the solidarity surcharge (Solidaritätszuschlag) in 2020 and 2021. The complainants, members of the Free Democratic Party who were members of the Bundestag at the time, argued that the surcharge had lost its constitutional justification when the Solidarity Pact II for eastern Germany expired at the end of 2019, and that limiting it to higher earners from 2021 violated equal treatment. The Court disagreed on both points.

For companies, the decision means that the surcharge of 5.5% on corporate income tax remains in place, alongside the gradual reduction of the corporate tax rate from 2028.

The judgment also clarified the constitutional framework for supplementary levies (Ergänzungsabgaben) under Article 106(1) no. 6 of the Basic Law. A supplementary levy requires a specific additional financial need of the Federation linked to a particular task; it need not be limited in time or to emergencies; but if the additional need evidently disappears, the legislature must abolish or adjust the levy. The legislature has a duty to monitor whether the conditions continue to be met. This leaves the door open to future challenges if the reunification-related need on which the surcharge is based declines further.

Background: the surcharge and the 2019 reform

The solidarity surcharge was reintroduced in 1995 under the Solidarity Surcharge Act (SolZG 1995) to finance the costs of German reunification. It is levied as a supplement on income tax, capital gains tax and corporate income tax. Under § 4 SolZG, it amounts to 5.5% of the assessment base, which is generally the income or corporate tax due. When the Solidarity Pact II, which governed special federal payments to the eastern states, expired at the end of 2019, many expected the surcharge to end as well.

Instead, the legislature passed the Act to Reduce the Solidarity Surcharge of 10 December 2019. With effect from 2021, it substantially raised the exemption thresholds for income tax under § 3 SolZG, so that most individual taxpayers no longer pay the surcharge, while higher earners, investors subject to the flat tax on capital income and companies subject to corporate income tax continue to pay it in full. The complainants, who as members of the Bundestag had received advance payment notices for the surcharge for 2020 onwards, challenged the continued levy and the new distribution of the burden.

The holdings of the BVerfG solidarity surcharge judgment

The Court's guiding principles can be summarised as follows. First, a supplementary levy under Article 106(1) no. 6 GG requires a task-related additional financial need of the Federation, which, according to the legislature's assessment that the Court reviews only to a limited extent, is likely to arise from the performance of a specific task and to cover which the levy appears necessary.

Second, if this additional need evidently ceases to exist, the legislature is obliged to abolish the levy or adjust the conditions for its collection. Third, the constitution neither requires a supplementary levy to be limited in time from the outset nor restricts it to emergencies. Fourth, the levy is not a subsidiary instrument that may only be used if the shared taxes cannot cover the need. Fifth, a supplementary levy linked to income tax may be socially graduated to reflect ability to pay.

Why the surcharge survived

On the continued financial need, the Court accepted that the Federation still bore reunification-related costs in 2020 and 2021, for example in the statutory pension insurance system and in labour market spending, that were not fully covered by other revenues. The expiry of the Solidarity Pact II did not mean that reunification costs had ended; it only ended one particular mechanism of financing them. The legislature's assessment that an additional need persisted was not evidently wrong. The Court emphasised that it reviews such assessments of the legislature only for evident errors.

On equal treatment, the Court held that the legislature may graduate a supplementary levy socially, as it did by raising exemption thresholds from 2021. Because the surcharge is linked to income tax, which is itself progressive, distributing the additional burden according to ability to pay is consistent with the constitutional principle of taxation according to economic capacity. The fact that corporations do not benefit from the exemption thresholds was not decisive, given the different nature of corporate taxation.

Relevance for companies

For corporations, the BVerfG solidarity surcharge decision maintains the status quo. Corporate income tax under § 23 KStG is 15% until 2027 and then falls by one percentage point each year to 10% from 2032, under the reform adopted in 2025. The surcharge of 5.5% applies to the corporate income tax due, so its absolute burden will decline as the rate falls. Partnerships and sole proprietors are affected through their partners' or owners' income tax, where higher earners pay the surcharge in full. Withholding taxes on dividends, interest and capital gains are also subject to the surcharge, which matters for foreign investors calculating withholding tax and treaty relief.

Earlier, the Federal Fiscal Court had already held in its judgment of 17 January 2023 – IX R 15/20 that it did not consider the surcharge unconstitutional for 2020 and 2021 and declined to refer the question to the Federal Constitutional Court. The BVerfG has now confirmed that result on the merits. Pending tax assessments that were kept open pending the constitutional complaint can now be finalised. Companies that had filed objections against assessments in order to benefit from a favourable outcome should expect them to be rejected.

Procedural aspects of the BVerfG solidarity surcharge case

The case also illustrates how tax laws reach the Federal Constitutional Court. The complainants lodged their constitutional complaint directly against the statute and their advance payment notices, rather than first litigating through the finance courts. Normally, the principle of subsidiarity requires complainants to exhaust ordinary remedies first. The Court accepted the complaint as admissible, noting that, at the latest after the Federal Fiscal Court's 2023 judgment had rejected the constitutional objections, it could no longer be expected of the complainants to pursue the finance court route first.

For companies considering constitutional challenges to tax laws, the standard route remains an objection, an action before the finance court and an appeal to the Federal Fiscal Court, which can refer the question to the Constitutional Court under Article 100 GG if it is convinced the law is unconstitutional.

Where a constitutional question is pending, the tax authorities often issue assessments provisionally on that point, so taxpayers do not need to file objections to benefit from a favourable decision. Checking whether a provisional notice covers a particular issue is therefore a routine step in tax compliance.

Implications for foreign investors

For investors from abroad, the solidarity surcharge is mainly relevant as part of German withholding taxes. Dividends paid by German companies are subject to capital gains tax of 25% plus the surcharge, a combined rate of 26.375%, before any relief. Relief under double tax treaties or the EU Parent-Subsidiary Directive is applied to the combined amount, and foreign corporate shareholders may be entitled to a partial refund under domestic law. The BVerfG solidarity surcharge decision confirms that these calculations continue to include the surcharge.

Accounting and tax modelling

For financial reporting, the confirmation of the surcharge has a direct effect on deferred tax calculations. Companies measure deferred tax assets and liabilities using the tax rates expected to apply when temporary differences reverse, and for German corporations this includes the surcharge on corporate income tax and the applicable trade tax rate. With the corporate tax rate falling in stages from 2028, groups need to model the combined rate year by year, including the surcharge.

Had the surcharge been struck down, a remeasurement would have been required; the judgment removes that uncertainty for now, while the duty to monitor keeps a longer-term question open. Tax departments should document the assumptions they use and update them if legislation on the surcharge is introduced.

Future challenges and political debate

The BVerfG solidarity surcharge judgment is not a blank cheque. Because the levy's justification depends on a continuing reunification-related additional need, and because the legislature must monitor this, future challenges remain possible if that need evidently disappears. The judgment does not specify when that might be the case, but it makes clear that the levy cannot become a permanent general tax by default. The political debate continues: some parties advocate abolishing the surcharge entirely or for companies, while others point to its contribution to the federal budget. Any change would need to be made by statute, and the federal budget's dependence on the revenue makes abrupt abolition unlikely without compensating measures.

From a tax planning perspective, companies should not plan on the basis of an imminent abolition. If legislation is introduced, transitional rules and effective dates will determine its impact on deferred tax calculations, on group financing structures and on the valuation of tax attributes. Transaction models, including purchase price mechanisms that refer to tax rates, should be flexible enough to accommodate a change.

How TRW & Co helps

We advise companies, investors and private clients on German income and corporate taxation, including the solidarity surcharge, withholding taxes and the effects of the corporate tax reform. We support tax planning, transactions and disputes with tax authorities and before the finance courts, and we monitor constitutional and legislative developments relevant to our clients. Our work connects with our corporate and transaction tax and tax disputes practices; see also our notes on the corporate tax rate cut and withholding tax relief. Please contact us to discuss your situation. This briefing is general information, not legal or tax advice.