Country specific - Germany

German Federal Ministry of Finance publishes draft law amending interest rate on additional tax claims and tax refunds – New proposed annual interest rate of 1.8% p.a.

In response to the decision of the German Federal Constitutional Court (hereinafter: FCC) of July 8, 2021 - 1 BvR 2237/14 and 1 BvR 2422/17 (BGBl. I 2021 p. 4303), which was published on August 18, 2021, the German Federal Ministry of Finance presented a draft law on February 22, 2022 on the revision of the interest on additional tax claims and tax refunds in accordance with Section 233a German Revenue Code.

According to the draft law now presented by the German Federal Ministry of Finance, the interest rate for back payment and reimbursement interest for the period from January 1, 2019, is to be reduced from 0.5% to 0.15% per month. This corresponds to an annual interest rate of 1.8% p.a. instead of the previous interest rate of 6% p.a. The reduction relates exclusively to the interest according to Section 233a of the German Revenue Code. Deferral, evasion and suspension interest (Sections 234, 235 and 237 German Revenue Code) as well as late payment penalties (Section 240 German Revenue Code) are not covered by the draft law. Additional tax claims and tax refunds for the following tax types are affected by the interest rate adjustment: income tax, corporation tax, wealth tax, VAT and trade tax.

With regard to the retroactive effect of the regulation for periods from 2019, the legislator intends to grant taxpayers protection of legitimate expectations via Section 176 German Revenue Code. The changed interest rate is therefore to be applied in all proceedings pending on the day after the promulgation of the amending law, but with the reservation that Section 176 German Revenue Code may not be applied to the detriment of the taxpayer. Furthermore, despite the changed interest regulation, the interest rate that was used as a basis for the original determination of the interest on arrears is decisive when determining reimbursement interest in cases of change.

Currently it is planned that the German Federal Cabinet will submit the draft bill to the German Parliament (Bundestag) as a government draft law on March 30, 2022. The law should then come into force on the day after its promulgation in the Federal Law Gazette, but no later than July 31, 2022, in order to fulfill the FCC’s mandate within the specified time frame.

DLA Piper Comment: With the current draft bill, the German Federal Ministry of Finance has complied with the order of the FCC and has drafted a new regulation for the interest periods from 2019 onwards, which is intended to include all tax assessments that are not yet legally finally assessed. Now it depends on the coordination and implementation of the draft within the two legislative bodies. It remains to be seen whether the draft of the new regulation and the later amendment to the law will be constitutional. In any case, with the draft, the legislature has now reduced a source of income for the tax authorities - they can no longer look forward to collecting lavish/non-market-based interest in the event of additional tax claims. At the same time, however, taxpayers can no longer look forward to unusual/non-market-based interest rates on their tax refunds.

The FCC's declaration of incompatibility did not include other interest calculations such as deferral, evasion and suspension interest. The draft bill also does not provide for any new regulation of the interest rate for other interest rates under the German Tax Code or under the individual tax laws or for late payment surcharges. With regard to these interest rates, it remains to be seen when the legislature will make new regulations on the amount of interest.

From 2019 onwards, the draft will have practical significance for taxpayers whose tax assessments are not yet legally finally assessed (i.e., procedurally still "open", e.g., due to an objection, due to the reservation of the review or due to a provisional note). How many taxpayers are actually affected remains unclear. However, there will be numerous cases because the tax offices have only provisionally fixed the interest in all tax assessments since May 2019 due to the unclear legal situation.