Germany suspends interest charge on late tax payments providing relief for MNEs

By Ninja-Antonia Reggelin

The Ninth Senate of Germany’s Federal Fiscal Court has questioned the constitutionality of a German law that imposes large interest charges on unpaid taxes and has suspended enforcement of the law from 2015, the court announced May 14.

According to para 233a AO (German fiscal code), interest is charged or credited on unpaid taxes if the tax assessment notice is not issued within 15 months after the end of the respective calendar year.

Since its introduction in 1961, interest at a 0.5 percent rate has been imposed on tax underpayments for each full month after the 15th month (i.e., six percent per year). This interest charge has become extremely burdensome for MNEs subject to lengthy tax audits that must face hefty interest fees years later.

For 2016 tax audits alone, the tax authorities collected € 2.2 billion (USD 2.6 billion) in interest under § 233a AO.

Germany’s Finance Ministry argues that the interest rate works both ways, applying to taxpayer liabilities but also to credits, and is thus equitable.

In February 2018, the Third Senate of the same court issued its verdict on a similar case involving interest payments from 2013. In that case, the premium of six percent was indeed assessable (ref. III R 10/16).

Therefore, it is quite surprising that this new decision of the Ninth Senate essentially contradicts the recently passed judgment and speaks of “grave constitutional doubt” relating to the interest amount.

For the disputed periods as of 2015, the court no longer sees the low level of market interest rates as a temporary phenomenon with typical cyclical fluctuations in interest rates but as structurally and sustainably consolidated.

It would not suffice to argue that much higher interest rates in other areas can be incurred, such as 14 percent for credit card loans or 9 percent for current account overdrafts, the court said.  It should rather be considered an “unrealistic assessment basis” that is not justifiable either because of practicability or to offset the benefit of delayed tax payment. In all, the law does not provide a comprehensible reason for the high rate of interest.

Due to the ensuing considerable doubts as to the compatibility with the constitutional equality requirement of Art. 3 GG and the prohibition of excess (Art. 20 (3) GG), the court granted a suspension of the execution of the interest rule.

 The court therein expressly reprimanded lawmakers who had previously acknowledged the problem but have done nothing change the more than 50-year-old rate.

Until further notice, taxpayers must take action themselves and possibly raise an objection against an interest assessment notice citing this decision.

The final decision regarding interest rates from 2015 remains with the Federal Constitutional Court. This is now one of several cases to be decided by the court pertaining to the high rate; the others deal with taxable periods from 2010 and 2012 and the interest calculation for pension provisions.