Federal Constitutional Court rules annual 6 % interest rate on tax claims and tax refunds unconstitutional

The decision by the Federal Constitutional Court regarding the constitutionality of the tax rate on tax claims and refunds had been long-awaited by many taxpayers. In the past years, the tax administration only issued preliminary assessments regarding the interest rate in anticipation of the pending ruling.

Incompatibility with the Constitution for interest periods from 2014 onwards, inapplicability, however, only as of 2019

According to German tax law, tax claims and tax refunds carry an interest rate of 0.5% per month, beginning after an interest free period of 15 months after the tax arises. The relevant article of the German Fiscal Code (Art. 233a German Fiscal Code) had originally been introduced by the Tax Reform Act of 1990 and aimed at achieving an equal burden for taxpayers, independently of the point in time the tax is finally assessed and due. Accordingly, a fixed interest rate based on the market interest rate was established.

Due to the continuing phase of low interest following the financial crisis of 2008, the Federal Constitutional court now ruled the interest rate of 0.5% per month unconstitutional for interest periods beginning 1 January 2014. The court argued that it had proven unrealistic to achieve this interest rate on the market from 2014 onwards due to the changes in the economic circumstances. For the time until 2014 the court, however, ruled the interest rate to be constitutional.

The current laws, however, remain applicable for interest periods up to and including the year 2018. The court argues that applying new legislation retroactively for interest periods as of 1 January 2014 until 31 December 2018 would give rise to significant budgetary uncertainties. For the interest periods starting 2019 the court, however, ordered the inapplicability of the interest rate, arguing that the risks for reliable financial and budgetary planning by Federal and State governments as well as municipalities for periods following 2018 would be much smaller. The court obliged the legislator to adopt a constitutional new regulation by 31 July 2022.

It must be pointed out that the decision by the court does not affect other interest rates stipulated under the German Fiscal Act such as, for instance, deferral interest, tax evasion interest, suspension interest. Regarding these types of interest, a separate constitutional assessment is necessary as these types of interest are the result of an application or conscious acting of the taxpayer. They are also not only aiming at counterbalancing any interest advantages or disadvantages but also have a steering role.

Implications of the ruling

In practice, the court's decision has substantial implications, as in the context of tax audits, a lot of time often passes until the final assessment of the tax is issued. As for the assessment period 2019 this the start of the interest period has been postponed due to the Corona-pandemic this is not an issue for the 2019 tax returns. The Federal Constitutional Court has made it explicitly clear that it is not its task to decide on the type of interest rate or how high the interest rate should be.

Therefore, it remains to be seen what type of interest and which interest rate the legislator will decide on after the upcoming federal election.

Dr. Marion Frotscher
Simon Bauer