The withholding tax is retained for income from capital assets by the entity paying the capital income and paid to the tax office. Withholding tax is a special form of income tax. Although the withholding tax has been in force since 2009, it is regularly discussed with regard to fundamental constitutional principles of tax law. Compatibility with the subjective net principle is particularly problematic. The reason for this is that the basic allowance is not granted in the applicable compensation scheme. Consequently, the current withholding tax in its concrete form could violate the subjective net principle and therefore be unconstitutional. These questions are clarified in this contribution.

The subjective net principle is a tax principle of the highest constitutional rank. It is derived from the fundamental right of human dignity (Art 1 I GG) in conjunction with the welfare state principle (Art 20 I GG). Tax laws intervene in the personal development in property law and in the professional area (Art. 14 para 1, Art. 12 para 1 GG). Therefore, it is of considerable importance that the tax laws have no “strangling effect”. Consequently, the protected fundamental right may be limited only to the extent that the taxable person remains a part of the success of his own economic activity for private purposes and is free to dispose of it. Consequently, the taxpayer, after fulfilling his income tax liability, must remain from his acquired person as much as he needs to satisfy his necessary subsistence and that of his family. Consequently, the taxpayer's minimum subsistence is at the heart of his human existence. Interventions in the subjective net principle can only be justified under very strict conditions.

In principle, the legislature is free to decide in which way it secures the subsistence minimum. However, it must act consistently and consistently. The requirement of consistency requires that the legislature implements the discharge decision once taken consistently in the sense of equal burden. Therefore, the difference in the tax burden for the same economic performance is contrary to the principle of consistency if that difference cannot be justified by objective reasons.

Every statutory regulation can generalize, be guided by the rule and not take into account all the specificities of the individual case through special regulations. The legislator may therefore determine the minimum subsistence level for the handling of the mass proceedings by typing. However, it must be dimensioned in such a way that, if possible, the need for existence is covered in all cases. Therefore, the legislature may not make the assessment of the subsistence minimum dependent on the individual marginal tax rate or other personal circumstances. Rather, an identical requirement for all is to be included in the income tax requirements. The level of the minimum subsistence level to be exempted for tax purposes depends on the general economic situation and the minimum standard recognised in the legal community.

The withholding tax is withheld at the source at a tax rate of 25% (§32d I 1 EStG). The tax is therefore owed from the first euro. Consequently, no account is taken of the personal circumstances of the taxable person. The basic allowance of § 32a I 2 EStG does not apply under the withholding tax. It only applies if it is obligatory to invest in accordance with § 32d III EStG or the option right of § 32d II 1 No. 3 EStG has been exercised. In addition, according to § 32d VI EStG, it is possible to apply for a favourable examination. Accordingly, the standard taxation applies if the standard tax is lower due to the progressive tax rate. Within the framework of standard taxation, the basic allowance is then also taken into account. Therefore, the application of the basic allowance depends on certain conditions. It is questionable whether this is compatible with the subjective net principle.

Exemption of the subsistence minimum is granted to all taxpayers in the same way and in full. This must apply regardless of the amount of income and the individual marginal tax rate. The state must not access the subsistence minimum. The basic allowance is granted within the framework of the cheaper examination of § 32d VI EStG only if the application of the general income tax rate leads to a lower tax than the withholding tax rate. Otherwise, an application of the basic allowance cannot in principle be considered. As a result, some recipients of private capital income whose individual tax rate is above 25 % do not receive a basic allowance. Taxpayers with low capital gains, on the other hand, can claim the basic allowance.

This is an intervention in the subjective net principle. Nevertheless, this intervention could be objectively justified. The introduction of the withholding tax served the purpose of securing the tax revenue. Therefore, that consideration could constitute a factual justification for limiting the subjective net principle. It should be noted that fiscal purposes can never be a sufficient justification. This is based on the fact that the collection of taxes always serves to generate state revenue. If the safeguarding of the tax revenue were now sufficiently justified, the State could justify any tax measure by fiscal considerations. Then the principle of proportionality will become irrelevant. Rather, any measure would have to be justified and thus proportionate if it only drives the state budget.

In addition, the restriction of the subjective net principle could be justified by the low tax rate of 25%. Nevertheless, this low tax rate also applies where there is still no capacity. The tax is levied from the first euro and thus below the basic allowance. However, the subjective net principle prohibits the legislature from taxing where there is no capacity at all, irrespective of the level of the tax rate, since the taxpayer makes living expenses within this framework. Furthermore, the taxpayer receives the basic allowance without exception outside the withholding tax. The legislator has therefore decided to grant the basic allowance and must then also consistently uphold this decision. This is contradicted if he assumes in the context of the withholding tax that the refusal of the basic allowance can be justified by the fact that the taxpayer, after the deduction of the tax, has sufficient income to cover the necessary expenses.

Therefore, only tax simplification can be considered as a justification. However, this is countered by the fact that the basic allowance is granted in accordance with the amount of capital income. It is therefore necessary to check in individual cases whether the taxable person falls below the limit. A blanket exemption simplifies the fixing procedure compared to an individual case.

In addition, the granting of the allowance depends on the application of the taxable person. Legislators cannot trust that taxpayers will not submit the application. Especially with income from capital assets, the taxpayer is advised to be looked after. The advisor will then make the request. In this case, the tax office must then check whether the standard taxation or the withholding tax is beneficial for the taxpayer. This makes the taxation procedure considerably more difficult than the granting of the basic allowance without exception. Therefore, the restriction of the subjective net principle cannot be based on simplification aspects. There are therefore no such weighty justifications which can justify an intervention in the core sphere of human existence in the form of the subjective net principle.

Under these arguments, it can be assumed that the current withholding tax does not comply with the subjective net principle. It therefore remains to be seen whether BFH sees these arguments and submits the withholding tax to the BVerfG.