Solidarity surcharge currently still constitutional

The solidarity surcharge, introduced in 1995 to finance the costs of German reunification, has been constitutionally controversial from various points of view for many years. In 2023 that the Federal Fiscal Court ruled that the solidarity surcharge in 2020 and 2021 was not (yet) unconstitutional. On 26 March 2025, the Federal Constitutional Court pronounced its judgment on the 2020 solidarity surcharge (after the expiry of the ‘Solidarity Pact’) and for the years 2021 and following (after the reduction of the solidarity surcharge  only applicable to about 5% to 10% of taxpayers, namely higher income groups): Accordingly, the solidarity surcharge is constitutional and may still be levied.

What exactly is the dispute about?

The solidarity surcharge is a surtax on income tax and corporate income tax. The revenue from these two taxes accrues jointly to the Federation and the federal states (joint tax). However, the solidarity surcharge as a surtax accrues solely to the Federation and the federal states are not involved in the related legislation. Article 106 of the German Basic Law provides for a possibility to charge a surtax to cover the “additional funding needs” of the Federation that cannot be met in any other way. This does not automatically result in a time limit, but it does result in an earmarking of the revenue and an obligation on the legislator to provide a justification. Otherwise, the surtax would become an unconditional ‘federal income tax or corporate income tax’, which would not be in line with the distribution of these joint taxes as regulated in the Basic Law. 

Federal Constitutional Court still recognises funding needs arising from reunification 

Originally, the solidarity surcharge was introduced to provide funding for the needs of the German reunification in 1990. The sharing and allocation of special funds between the Federation and the federal states was regulated by the “Solidarity Pacts I and II”. The Solidarity Pact II expired in 2019. However, this is irrelevant following the judgment of the Federal Constitutional Court. In the view of the court, even today structural differences remain between East and West Germany. An expert opinion and presentations by economic experts at the hearing on 12 November 2024 “make it clear that there is no evidence of a discontinuation of the additional needs caused by reunification.” Only “an evident discontinuation” or, alternatively, an evident imbalance between the revenue from the solidarity surcharge and the additional financial needs resulting from reunification would subsequently establish a legal obligation for the legislature to abolish or adjust the solidarity surcharge. The federal legislator therefore has a duty to monitor the situation and, if necessary, adjust the law. It is irrelevant in this context that the Federation has incurred further special financial needs from 2020 due to the COVID-19 pandemic and thereafter for the support of Ukraine after Russia's war of aggression. 

For years from 2021, it was additionally disputed whether unequal treatment has arisen from the fact that approximately 90% of income taxpayers are exempt from the solidarity surcharge. Since 2022, higher incomes, currently up to around 73,500 euros (for single taxpayers) / 147,000 euros (for married taxpayers filing jointly), have been completely exempt from the solidarity surcharge. This social differentiation, which was introduced in addition to the income tax rate, is compatible with the principle of the social responsibility and, according to the court's decision, does not constitute a breach of the principle of equality. The court also did not object to the special levying of the solidarity surcharge on the withholding tax on capital gains [Abgeltungssteuer].

The judgment of the Federal Constitutional Court and what it means for taxpayers

The Federal Constitutional Court has ruled that for the time being, nothing will change for taxpayers or the state budget. The solidarity surcharge still applies. It remains to be seen whether the new coalition government of CDU/CSU and SPD will adjust the solidarity surcharge in addition to the planned changes to the income tax rate. The preliminary agreement [Sondierungsvereinbarung] of 8 March 2025 provides for “relief for the middle class with an income tax reform”.

We will keep informed.