Constitutionality of interest rate in tax proceedings referred to the Federal Constitutional Court

In 2021, the Federal Constitutional Court held that the rate of 6% p.a. for interest on late payment of tax arrears or refunds was no longer compatible with the German Constitution due to its evident lack of market realism in an environment of low interest rates. Consequently, the legislator amended this interest rate to 1.8% p.a.

However, the rate was not adjusted for other types of interest, including interest payable after a suspension of a law enforcement where the tax is due. The Federal Fiscal Court deems this to be incompatible with the German Constitution.

From the taxpayer's perspective, charging interest at this rate has implications that extend beyond their purpose (i.e. preventing a gain from the amount of tax due). Secondly, there is a discrepancy in treatment between taxpayers whose tax payments are initially suspended and who must pay suspension interest, and taxpayers who must pay interest on arrears. It is also important to note that the unequal treatment cannot be justified because the taxpayer has the option to avoid interest on suspension. By applying for suspension of enforcement, the taxpayer is aware that he is accepting the risk of suspension interest.

Key Takeaway

Even without a final verdict, the referral by the Federal Fiscal Court is a positive sign. In contrast to interest on arrears or refunds (lowered retroactively as of 1 January 2019), not only VAT is affected here, but all indirect taxes. It is, therefore, advisable to apply for suspension of enforcement due to constitutional concerns on the interest rate with reference to the proceeding pending at the Federal Constitutional Court.

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