Vol 1 (2005) - Issue 5

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Abolition of Tax Priorities in Germany: A Myth?

Introduction

Tax priorities are provisions which privilege tax claims of tax authorities over other unsecured claims of ordinary creditors in the course of insolvency proceedings. Normally, only secured creditors enjoy priority treatment whereas unsecured creditors are treated equally (pari passu principle), i.e., their claims are settled proportionately. This principle is also embodied in German insolvency law.
Given high budget deficits, many governments may consider revenue as a justification to provide for ‘tax priorities’. Accordingly, tax priority rules can be found in many jurisdictions. However, some countries have overcome the temptation of increasing their revenue through preferential treatment of tax claims in insolvency proceedings. Germany is one of the countries that ‘officially’ abolished tax priorities in its insolvency law. A closer look at the German legal system, however, reveals provisions allowing tax authorities to cover tax claims totally, or at least at a better proportion than they would according to the pari passu principle. Such provisions have been named ‘backdoor’ tax priorities.
This article will outline the legal position as regards statutory and ‘backdoor’ tax priorities in Germany. A conclusion closes the article.

Statutory tax priorities

The German Insolvency Act (Insolvenzordnung; hereinafter: InsO) does not provide for a priority of tax claims, as did its predecessor, the Bankruptcy Act (hereinafter: KO) which was replaced with effect from 1999. The KO stipulated that tax claims rank before ordinary unsecured claims (Fiskusprivileg). The effect was that little or nothing was left for unsecured creditors. Now, German tax authorities are to be treated equally with all other unsecured creditors.
The treatment of the expenses of liquidation (Masseverbindlichkeiten) is not a substantive exception to the pari passu principle, although it developed as an exception to the principle of equal treatment of creditors.