Previous interest rate of 6% p.a. unconstitutional since 2014
In its decision published on 18 August 2021, the Federal Constitutional Court (Bundesverfassungsgericht - BVerfG) ruled that the previous interest rate of 0.5% per full month of interest - i.e. 6% per year - for interest on arrears and refunds since 2014 is too high and violates the constitution. However, it has ruled that the interest rate may continue to be applied for interest periods until 31 December 2018. For interest periods from 1 January 2019 onwards, the legislature must make a retroactive, constitutional new regulation of the interest rate for interest on arrears and refunds for all open cases. The Federal Ministry of Finance has now presented an initial draft bill.
Interest rate to be lowered to 1.8 % p.a.
The interest rate applicable to interest on arrears and refunds is to be reduced from 0.5% per month to 0.15% per month for interest periods from 1 January 2019. This corresponds to an interest rate of 1.8% per year. This change refers explicitly only to interest on back payments and refunds. The interest rate for other types of interest, such as deferral, evasion and suspension interest, remains unchanged at 6 %.
Adjustment possible every three years in future
In order to be able to react to sustainable changes in the interest rate environment in the future, the draft law - unlike before - provides for an adjustment clause. According to this, the interest rate is to be evaluated every three years in the future, taking into account the development of the base interest rate according to § 247 of the German Civil Code (BGB), with effect for subsequent interest periods. However, the interest rate shall only be adjusted if the base interest rate applicable on 1 January of the year of evaluation deviates by more than one percentage point from the base interest rate applicable at the time of the last determination or adjustment of the interest rate pursuant to section 238 (1a) of the German Fiscal Code (AO).
Previous decree regulation becomes law
Until now, anyone who makes voluntary advance payments on their tax burden - e.g. on an additional payment expected in the course of a tax audit or voluntary disclosure - had to apply for a waiver of the excessively high interest on grounds of material equity. This cumbersome practice is to be a thing of the past according to the draft law, because from now on interest will not even accrue if the taxpayer makes a voluntary payment and the tax authorities have accepted it and credited it later.
Only selective adaptation to constitutional law
The draft bill submitted by the Federal Ministry of Finance implements the constitutional interest rate for interest on arrears and refunds demanded by the BVerfG in a perfectly fitting manner. The opportunity to reform interest in tax law as a whole and to adapt it to the changed interest rate environment is not seized. Despite considerable constitutional concerns, the valuation interest rate of 5.5 %, the discounting of non-interest-bearing liabilities at 5.5 % and the discount rate for the valuation of pension provisions under tax law at 6 % remain unchanged, in addition to the other interest rate provisions of the tax code. For taxpayers, the only thing left to do - as is often the case - is to hope for a decision by the Federal Constitutional Court.