Unexpectedly, a 6.0% interest rate surfaces at the tax department?
German Court Rules Against High Suspension Interest Rates
In a significant decision for taxpayers, the Federal Constitutional Court has ruled that the statutory interest rate for suspension interest in Germany is unconstitutional. The ruling, published on December 14, 2022, follows a case where a citizen appealed their 2012 income tax assessment, and the tax office suspended its enforcement.
The Federal Fiscal Court (BFH) had previously set the suspension interest at 6 percent p.a. for 78 months, including the period from January 1, 2019, to April 15, 2021. However, the BFH now agrees with the appellant that during a prolonged low-interest phase, an interest rate of 6 percent p.a. is no longer necessary to offset the potential liquidity advantage of a later payment.
The BFH believes that an interest rate of 6 percent p.a. during the period from January 1, 2019, to April 15, 2021, is incompatible with Article 3(1) of the Basic Law. This article guarantees the inviolability of property and prohibits the expropriation of property without compensation.
The matter has been referred to the Federal Constitutional Court for further consideration (Az. VIII R 9/23). There is a good chance that the Federal Constitutional Court will make a taxpayer-friendly decision in this case, considering the difference in treatment between taxpayers who owe interest due to the suspension of enforcement and those who pay late payment interest due to a difference in their tax assessment.
It is important to note that in tax law, an appeal or lawsuit does not automatically suspend the collection of taxes. The taxpayer must pay the assessed tax initially, but the tax office or tax court can suspend enforcement (AdV) upon application if there are serious doubts about the legality of the challenged notice.
This ruling affects the statutory interest rate for suspension interest in Germany. Since January 1, 2019, late payment interest has been calculated at a rate of 0.15 percent per month, or 1.8 percent p.a., and becomes due if a tax payment or refund is delayed by more than 15 months. If a taxpayer's appeal ultimately fails and they pay the tax "retroactively," they may be charged interest.
In 2021, the Federal Constitutional Court ruled that charging late payment interest on tax debts at a rate of six percent p.a. is not compatible with the Basic Law. This decision paved the way for the current ruling, which further clarifies the constitutionality of suspension interest rates in Germany.
This development is expected to provide relief for many taxpayers who have been burdened with high suspension interest rates in the past. It underscores the importance of understanding one's tax rights and seeking legal recourse when necessary.
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