German Federal Constitutional Court - Order of 8 July 2021 - 1 BvR 2237/14, 1 BvR 2422/17 - Unconstitutionality of interest on tax arrears and tax refunds at 6% p.a.
In its decision published on the 18 August 2021, the Federal Constitutional Court (Bundesverfassungsgericht, hereinafter: Court) ruled that the interest on back taxes and tax refunds in § 233a in conjunction with § 238 par. 1 sent. 1 of the German Fiscal Code (Abgabenordnung, hereinafter: Fiscal Code) is unconstitutional insofar as the interest calculation was based on an interest rate of 0.5% per month.
Due to the uniform regulatory concept of the legislator, the incompatibility of interest pursuant to § 233a AO is not limited to interest on arrears charged to taxpayers, but also includes interest on refunds for the benefit of taxpayers.
However, the rules continue to apply to interest periods from 1 January 2014 to 31 December 2018, without the legislator being obliged to create a constitutional rule retroactively for this period as well. Thus, these periods are neither changeable for the tax administration nor for the taxpayer as far as interest is concerned.
In § 238 of the Fiscal Code, the amount and calculation of the interest for all interest-bearing offences of the Fiscal Code are uniformly regulated. The interest rate of 0.5% per month thus applies not only to the calculation of interest pursuant to § 233a of the Fiscal Code, which is indirectly challenged in this respect by the constitutional complaints, but also to the deferral, evasion, procedural and suspension interest pursuant to §§ 234 to 237 of the Fiscal Code. In the present decision, however, the Court did not extend the declaration of incompatibility precisely to the other interest payment situations under the Fiscal Code to the detriment of the taxpayers, namely to deferral, evasion and suspension interest under §§ 234, 235 and 237 of the Fiscal Code. With deferral, evasion and suspension interest the taxpayers have in principle the choice whether they carry out the interest facts and accept the interest rate regulated in § 238 par. 1 sent. 1 Fiscal Code or whether they repay the tax debt and procure themselves in case of need the necessary funds for the settlement of the tax debt elsewhere at more favorable interest conditions.
Essentially, the Court bases its now published decision on the following considerations:
The full interest with an interest rate of 0.5% per month for interest periods falling in 2014 was no longer necessary, and therefore disproportionate, and hence violated the principle of equality under Article 3 par. 1 of German Basic Law. The full interest at the expense of the taxpayer with an interest rate of 0.5% per month was initially constitutional. The legislator was entitled in principle to determine the interest advantage of the taxpayers achieved by a late tax assessment in a standardised manner for the purpose of administrative simplification. In 1990, for reasons of practicability, the legislator had taken up the provisions of § 238 of the Fiscal Code, which had already applied to the previous circumstances in which interest was charged. Moreover, the interest rate of 6 % per annum roughly corresponded to the conditions on the money and capital markets, which were relevant as a criterion in this respect.
From 2014 onwards, however, the interest rate set by type had proved to be manifestly unrealistic. The typical interest rate of 6 % per annum is no longer capable of adequately reflecting the potential advantage arising from late payment of the tax. After the outbreak of the financial crisis in 2008, a structural and sustainable low interest rate level had developed which was no longer an expression of normal interest rate fluctuations. This can be seen in particular in the development of the base rate. In 2008, it was still over 3 %, but it had already fallen to 0,12% in the course of 2019. It has been negative since January 2013.
The constitutional complaint in proceedings 1 BvR 2237/14 was therefore unfounded for the period from 2010 to 2012 and the constitutional complaint in proceedings 1 BvR 2422/17 was only well-founded for the interest period from 1 January 2014 to 14 July 2014. For interest periods falling into the year 2013, there was still no evidently excessive effect of the full interest. A constitutionally conspicuous disproportion did not yet exist in this respect. The prohibition of excessiveness to be derived from Article 2 par. 1 in conjunction with Article 20 par. 3 of the German Basic Law was also not violated in this respect.
Comment:
The Court has thus finally ruled on the interest issue that has preoccupied the courts and the specialist public for years. Inevitably, the Court could only deal with past assessment periods, which is why it is now up to the legislator to create a new regulation for the periods from 2019 onwards. With regard to the exact amount or even an upper limit of the new interest rate to be regulated, the Court did not comment. From the point of view of the taxpayers, it is regrettable that the Court has not decided to instruct the legislator to also create a new regulation for the interest periods from 1 January 2014 to 31 December 2018. For these interest periods, the tax authorities retain the possibility of charging evidently excessive, unconstitutional interest on outstanding tax claims. Here, the problems with incompatibility rulings of the Court, which are repeatedly expressed in the literature, become apparent. Incompatibility rulings of the Court do not lead to a nullity of the provision. The fact that the regulation can continue to apply to credit interest will be only a small consolation for most taxpayers. In order to protect the state budget, the Court is limiting itself to allowing the provisions on the interest rate to continue to apply for the periods 2014 to 2018.
The decision will thus have practical significance from the 2019 tax year on for taxpayers whose tax assessments are not yet final (by way of an objection, by way of a reservation of review or by way of a provisional notice). It is unclear how many taxpayers are actually affected. However, it will be numerous cases, because the tax offices had only provisionally assessed the interest in all tax assessments since May 2019 due to the unclear legal situation. Those whose 2019/20 tax assessments are not yet final, thus in particular those whose tax assessments were issued from May 2019, can expect a repayment of interest on arrears (§ 233a AO). At the same time, those who have received a tax refund in tax assessments for 2019 or for subsequent assessment periods may have to repay the amount of interest overpaid under the new regulation to be adopted by the legislator.
The legislator is now required to enact a constitutional new provision by 31 July 2022, that retroactively extends to all interest periods beginning in 2019 and covers all tax assessments that have not yet become final.
If you have any further questions in this context, please do not hesitate to contact DLA Piper's tax team. Please feel free to call us or send us an email.
