March 8 (Bloomberg) -- Germany's Federal Constitutional Court may decide tomorrow that a tax on share sale gains is unconstitutional because the difficulty of enforcing the law makes it unfair, said Rolf Krauss, a lawyer at Lovells.

The law may breach the principle of equal treatment because banking secrecy rules mean authorities rarely enforce the tax, the Federal Finance Court ruled in 2002, referring the issue to the Constitutional Court for its judgment. Enforcement is also complicated as taxpayers aren't obliged to submit documents proving their income has been stated truthfully or to keep records of such documents, the court said.

``Pure coincidence decides who pays the tax -- this is clearly unconstitutional,'' said Krauss, who specializes in tax law.

The case centers on the 1997 tax return of Klaus Tipke, a tax law expert and retired professor from Cologne university. He reported 896 euros ($1,108) in share-sale gains and later challenged his tax assessment in court, calling it unfair.

``It is often doubted that such gains are actually being taxed,'' the Federal Financial Court said when it referred the issue of share-sale taxes to the Constitutional Court in 2002. ``Most taxpayers aren't stating these gains in their tax returns, and there is no effective control because of legal restraints.''

In a 1991 case relating to taxes on interest, the Federal Constitutional Court in Karlsruhe, Germany said that loose controls on tax enforcement violate the constitution.

`A Fool'

``For decades, tax authorities have demanded taxes that violated the German constitution and nobody cared,'' Krauss said. ``Whoever paid in the past was a fool -- that is the bitter conclusion.''

The Federal Constitutional Court isn't very likely to implement its ruling retrospectively because of the practical difficulty of compensating thousands of taxpayers and the ``disastrous consequences'' on the budget, Krauss said.

Germany's financial authorities don't have any effective means to determine the tax on the income correctly, the Federal Financial Court said in its July 2002 ruling. To ensure all citizens report share sale gains on their tax returns, the authorities need to have the power to verify taxpayers' statements, it said. Such authority is denied at present because of German banking secrecy regulations, it said.

Under German law, profits from share sales are taxed if the time period between the purchase and the sale doesn't exceed 12 months. Only 5 percent of taxpayers report share sale gains, according to an estimate by Germany's tax union.

Scrap The Tax

Still, the court could rule that new banking rules in January have sufficiently tightened the controls to justify the existing situation, Krauss added.

As of the start of the year, German banks must give their customers statements listing all account transactions including income from interest and securities. The tax authorities can now ask customers to submit these statements with their tax returns.

Other lawyers and law professors said that, based on the Federal Constitutional Court's judgment tomorrow, the German government will probably have to decide whether to scrap the tax or extend tax authorities' powers.

Joachim Lang, a professor for tax law at Cologne university, expects the court will also annul banking secrecy regulations because of the potential violation of the constitution. It won't be repealed completely though because the tax authorities must keep the information they receive confidential, he said.

The annulment of these regulations ``would give tax authorities full control of the banks,'' Lang said in a telephone interview. ``This would leave customers without any protection against the financial authorities.''

Their annulment ``would only promote tax evasion'' because people would move their money to other countries, Juergen Kurz, spokesman of Germany's biggest shareholder group DSW, said in a telephone interview.

Ruediger von Rosen, head of the German share institute, called for the tax to be abolished to simplify the tax system. The income resulting from the tax is low and unpredictable, making it hard to forecast for the state budget, he said in an article for the German newspaper Frankfurter Allgemeine Zeitung in November.

The case is 2 BvL 17/02.

To contact the reporter on this story: Corinna Budras in Frankfurt at cbudras@bloomberg.net

Last Updated: March 8, 2004 06:09 EST