Interest of 0.5% per month on tax arrears and refunds found unconstitutional

So far, low interest rates have affected everyone but the tax office

Tax audits often result in additional taxes for periods several years in the past, with interest of 0.5% per (full) month, or 6% per year, falling due after a 15-month grace period. According to lawmakers, taxpayers who do not have to pay their taxes until years later have an advantage over others because they can use the unpaid tax amount for other purposes. In their reasoning, the fiscal authorities should also be able to benefit from this advantage. But since interest rates of 6% have not been available on the market for a very long time, the fiscal authorities are benefiting from an advantage that no longer exists.

Federal Constitutional Court: interest rate level must be measured against economic reality

The provisions governing interest on tax arrears and refunds are incompatible with the German constitution due to the excessive interest rate. The court has taken a detailed look at the development of interest rates on the capital market and concluded that the interest rate is excessive – at least for interest periods (not taxation periods!) from 2014 onwards. However, the court has ordered that the interest rate of 0.5 % should continue to apply for interest periods up to and including 2018.

The German Parliament is required to adopt a constitutional new regulation by July 31 2022 which will apply retroactively to interest periods starting in 2019. The Federal Constitutional Court does not specify any details here, but points out that even a complete waiver of interest would be conceivable in view of the negative interest currently charged by banks. However, we consider this outcome to be highly unlikely.

The decision of the court applies not only to interest on arrears paid by the taxpayer, but also to interest on refunds paid by the tax office. It applies to all types of taxes.

Note: Interest on deferrals, interest on evasion and interest on suspensions of payment are not affected by the ruling. The rate in such circumstances remains 0.5% per month. Furthermore, it should be noted that another case regarding the unconstitutionality of the 6% rate for pension provisions for tax accounting purposes is pending before the Federal Constitutional Court (Case No. 2 BvL 22/17).

What does this mean for your interest assessment?

The Federal Ministry of Finance already ruled in 2018 that interest of 0.5% per month may only be assessed provisionally. The tax office can and must amend the interest assessment once the question of the constitutionality of the interest rate has been clarified and a new interest rate has been determined. Payment can be suspended upon request if a taxpayer files an objection against an interest assessment. The tax office must not decide on the appeal until the interest amount is clarified.

Here are the most important considerations:

1. Assessments already issued for interest on arrears for interest periods up to 2018
The tax office will revoke the provisional status. If you have filed an objection, the tax office will now reject it – or you may withdraw the objection. Interest at the rate of 0.5% per month must be paid.

2. Assessments already issued for interest on arrears for interest periods from 2019 onwards
The tax office cannot make a decision until new regulation of the interest amount has been finalised. If you have filed an appeal, the tax office will not decide on it until there is a new ruling on the interest amount. Any requested  suspensions of payment will remain in force. The tax office will assess interest according to the new interest rate once the new regulation is available.

3. Future assessments for interest on arrears for interest periods up to 2018
Because of the court’s order of continued applicability, the tax office will continue to assess interest at 0.5% per month for interest periods up to and including 2018. Provisional status will no longer be ordained in this respect. Any objections or requests for suspension of payment against the amount of interest have no prospects of success.

4. Future assessments for interest on arrears for interest periods from 2019 onwards
Presumably, the tax authorities will refrain from assessing interest until the new regulation is issued. Otherwise, they will provisionally assess 0.5% interest and change the rate once the new regulation is established. You can file an objection and a corresponding request for the suspension of the payment if 0.5 % interest is assessed without provisional status or if you do not wish to pay the interest for the time being.

5. Assessments already issued for interest on refunds for interest periods up to 2018 and from 2019 onwards
In our opinion, taxpayers enjoy protection of confidence. As a result, the interest of 0.5% per month once granted cannot be reversed by the tax office. Please note that refunds on interest are subject to income tax.

6. Future assessments for interest on refunds for interest periods up to 2018
Due to the court’s continued validity order, the tax office can continue to assess interest of 0.5% per month for interest periods up to and including 2018. Provisional status will no longer be ordained.

7. Future assessments for interest on refunds for interest periods from 2019 onwards.
Protection of confidence does not apply here. However, the tax office has no legal basis to make a constitutional interest assessment until the new regulation has been enacted. As a result, interest assessments will probably not be made until then. The points made above under number 4 will apply should an interest assessment nevertheless be issued.

There may be deviations for the assessment of interest on trade tax (German: “Gewerbesteuer”), as assessments in this respect are issued by municipalities rather than tax offices.

If you have any questions on this topic, Mazars will be happy to assist you. Simply contact your usual contact person or the colleagues listed below.