Federal Fiscal Court holds interest barrier to be unconstitutional

The First Senate of the German Federal Fiscal Court (Bundesfinanzhof – BFH) has submitted the re- gulation regarding the interest barrier to the Federal Constitutional Court (Bundesverfassungsgericht – BVerfG) as it believes it to be unconstitutional.

Legal situation

In general, interest costs related to operational activity are deductible as operating costs. The German legislature limited the ability to deduct these expenses in 2008, however, with the passing of section 4h of the income tax act (EStG) in conjunction with sections 8 and 8a of the corporation tax law.

According to this, interest costs are only deductible in the amount of the interest income and 30 % of the taxable EBITDA. The interest barrier allows for exceptions to this only in limited cases. The non- deductible part is to be carried forward in the following financial years.

Ruling by the BFH on 14/10/2015 (I R 20/15)

This case was brought about by a lawsuit filed by a real estate company: The plaintiff was incorpora- ted into a group structure. The interest costs for the years in question, 2008 and 2009, amounted to roughly five million euros for each year.

The fiscal court assessed the corporate income tax by application of the interest barrier and set a remaining tax carryforward for each year. An exception to the application of the interest barrier was not considered because the negative interest balance exceeded the limits of the interest barrier regulation. The other exceptions did not apply as well.

The lawsuit against the tax assessments was not successful. The plaintiff appealed this decision. The Federal Fiscal Court suspended the proceedings and called on the Federal Constitutional Court for a ruling.

The fiscal court made it clear in its resolution published on 10 February 2016 that it deemed the inte- rest barrier to be unconstitutional, as the ban on deductions is in violation of the principle of equality of the constitution. It is lacking a consistent structure of the income tax law based on financial perfor- mance. The “objective net principle” is disregarded as a result as the net income is not the basis for taxation. The Federal Fiscal Court did not see any justification for these violations.

The fiscal court had already expressed its doubts as to the constitutionality of the interest barrier in its resolution on 18 December 2013. The Federal Ministry of Finance responded to this with a non- application decree.


As a result of the presentation by the Federal Fiscal Court, a case must be opened with the Federal Constitutional Court, which will make a final decision as to the constitutionality of the interest barrier. It could, however, take years for a decision to be made. It cannot yet be predicted how the Federal Constitutional Court will rule. Tax assessment notices should be kept open until then.

Until a decision is made by the Federal Constitutional Court, the tax authorities can continue to set the taxes applying the interest barrier. It is possible that future tax assessments will be preliminary. They will then need to be amended to the benefit of the taxpayer if the interest barrier is (retroac- tively) declared to be unconstitutional. If the Federal Constitutional Court rules otherwise, it will become legally valid.

If the assessments do not contain a notice of provisional status, they should be contested to avoid them becoming legally valid.

For tax assessments based on the interest barrier, the assessed taxes are to be paid nevertheless. A reimbursement of these taxes will have an interest rate of 6 % p. a. for the benefit of the taxpayer. The interest accumulation will begin 15 months after the end of the corresponding tax year.

The payment obligation can be avoided for now by filing an appeal together with an application for the suspension of enforcement of the tax assessments. Whether or not the fiscal authority will now allow such applications remains to be seen. It has denied this until now.

If the Federal Constitutional Court deems the interest barrier to be constitutional, the question remains whether an interpretation of the interest barrier in accordance with the constitution would lead to a further or unlimited deduction of interest in certain situations (such as cases that are purely domestic). This decision lies with the fiscal courts.

The experts at Roever Broenner Susat Mazars will help you assess the income tax situation at your com- pany and make recommendations for action in your particular situation. Please feel free to contact us.