Germany: Draft law amending interest on back taxes and tax refunds

A draft law that would amend interest rate on back taxes and tax refunds

A draft law that would amend interest rate on back taxes and tax refunds

The German Federal Ministry of Finance (BMF) has published a draft law that would amend the interest rate on back taxes and tax refunds.

Background

The draft law responds to a 2021 decision of the German Federal Constitutional Court that held that the interest rate on back taxes and tax refunds of 6% annually (0.5% per month) was unconstitutional for interest calculation periods starting as from 2014. The court, however, found that the current rules for interest calculations applied for interest calculation periods up through 2018, but not for interest calculation periods as from 2019. Read TaxNewsFlash

The German Federal Constitutional Court further stipulated that the German legislature must amend these rules by 31 July 2022.

The BMF issued guidance in September 2021 providing that with regard to interest until 31 December 2018, the previous interest rate of 6% annually (0.5% per month) continued to apply, and addressing various other issues relating to interest on back taxes and tax refunds. Read TaxNewsFlash

Summary of draft law

The draft law would provide for a retroactive reduction of the interest rate for interest on back taxes and refunds to 0.15% per month (thus 1.8% per year) for interest periods from 1 January 2019. The new interest rate is based on the Deutsche Bundesbank's current base rate (-0.88% p.a.) with a mark-up of approx. 2.7 percentage points, which is considered "appropriate" according to the explanatory memorandum.

This interest rate is to be evaluated for appropriateness every three years taking into account movements in the base rate; this would then take effect for the following interest periods, for the first time as at 1 January 2026. If there were to be significant changes in the base rate, the interest rate could also be adjusted at an earlier date, according to the explanatory memorandum. To avoid overly frequent or minor adjustments to the interest rate, however, the rate is to change only if the base rate applicable as at 1 January of the evaluation year deviates by more than one percentage point from the base rate applicable when the interest rate was last fixed or adjusted.

The amendments would generally be applicable in all cases pending on the day following promulgation of the law. In cases of interest being recalculated retroactively, the comments in the draft law indicate that the principle of protection of confidence would apply. Accordingly, if an interest assessment is revoked or amended, the taxpayer may not be disadvantaged by any recognition of the Federal Constitutional Court's having established as invalid a law upon which the previous assessed interest was based.

This draft law contains no adjustment of other interest rates under procedural law such as interest on deferrals, evasion or suspension of collection. The Federal Constitutional Court explicitly stated in its decision that the unconstitutionality does not apply to these other interest situations falling under the same interest rate according to the Germany tax law. According to the explanatory memorandum, the question of whether and how these rules are also to be amended in view of the Constitutional Court's decision must be further examined in detail. 

What’s next?

The ministerial draft has been forwarded to relevant associations for comment. This will be followed by publication of the government draft, on which the Upper House of the German Parliament (Bundesrat) will then be able to add its comments. Thus, there may still be amendments in the course of the legislative process.

Read an April 2022 report [PDF 344 KB] prepared by the KPMG member firm in Germany

 

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