The BVerfG has finally decided: The current interest rate is unconstitutional, which is why the regulation on interest in tax law must be revised. Since such procedures always drag on for a long time at the BVerfG, there have already been administrative instructions in the past and several comments from the BFH. In any case, the BVerfG has ruled that for periods from 2014 onwards, the interest rate of 6% p.a. is unconstitutional due to a structural phase of low interest rates. How it came about, how it is implemented and what this means for you in concrete terms, read in this article.

That on 8. Judgment of the Federal Constitutional Court (Bundesverfassungsgericht, abbreviated: BVerfG) (file reference 1 BvR 2237/14 and 1 BvR 2422/17) – published by press release No 77/2021 of 18 July 2021. August 2021 – on the interest level on tax interest rates found that the interest level previously applicable was 0.5% per month (6% per annum) acc. Section 238 AO is unconstitutional.

Basically, the interest rate of 6% per year (p.a.) is unconstitutional, because we are in a current low-interest phase – Money has never been cheaper.

We had already discussed this topic in an earlier article – at that time there was no judgment.

As mentioned, the previous interest rate on interest is 0.5% per completed month. The interest period – from when the completed months are counted – begins only after the 15. Month after tax origination (so-called waiting period). The income tax 2020, which arises at the end of the calendar year 2020, will not be paid until the end of the 15. monthly interest; from 1 April 2022.

The first completed month would thus be April 2022, when the tax notice is issued, for example, in May 2022. The interest is in favour (interest on tax refunds) and in favour (interest on tax claims) of the taxpayer.

Not included – at least in the previous judgment – interest due to e.g. Tax evasion, tax reductions, deferral interest or litigation interest.

BFH also considered the fact that the interest rate of 6% per annum could be unconstitutional earlier. Already with the judgments of 25. April 2018, IX B 21/18 and from September 3, 2018, VIII B 15/18 he doubted the interest rate – At that time, the procedure already ran before the BVerfG, so that BFH could not do more here than wait.

The financial administration already reacted accordingly at that time and initiated the suspension of execution for interest-bearing periods from 01.04.2012 (BMF letter of 14 December 2018, IV A 3 – S 0465/18/10005-01) as well as BMF letter of 2. May 2019 (IV A 3 – S 0338/18/10002) to issue the tax assessments with regard to interest only provisionally (§ 165 AO). The above-mentioned BMF letters were last published on 27. November 2019 amended.

It can be inferred from the judgment of the BVerfG and the press release that the BVerfG already sees an unequal treatment of tax determinations in the fact that determinations are made in the waiting period without interest and precisely those determinations are fixed after the expiry of the waiting period with interest. The BVerfG sees here an unequal treatment of the same circumstances.

However, the BVerfG continues, this unequal treatment is justified. On the one hand, the legislator is required to carry out an interest on tax refunds and tax claims in order to e.g. an interest advantage, which the taxpayer may have obtained and thus could not obtain the tax office, to compensate – this of course also applies the other way round.

On the other hand, the legislature must also draw a limit for the start of interest somewhere. Here he has committed himself to the waiting period of 15 months. This time is usually sufficient to carry out tax determinations in a timely manner – with regard to the filing periods of the tax returns – without included interest.

The judgment states in this respect that at the time of the adoption of the law in 1990 – when the law was passed by the Bundestag – the interest rate of 6% per annum also corresponded to a normal interest rate on the money and capital market. In this respect, the legislator had acted correctly here and oriented himself to the normal market conditions.

The BVerfG considers it a given that from the 2008 financial crisis, but at the latest from 2014, a constant, structural low interest rate level has settled. The BVerfG makes this clear by the fact that the basic interest rate has fallen into the negative interest rate range since 2013 and that the market discount rate is also very low in contrast to the past. This low-interest phase is no longer subject to the usual fluctuations in interest rates, as you were before the financial crisis.

While the low interest rate phase from 2008 onwards was only of a short-term nature, it was at the latest – by market analysis and comparisons with the base interest rate – a structural level from 2014 onwards. For this reason, the BVerfG also declared the period from 2014 onwards unconstitutional – because from here onwards the tax interest rate of 6% p.a. was sometimes more than double what was usual on the market at the time.

The BVerfG has thus declared interest periods from 01.01.2014 unconstitutional. At the same time, he has commissioned the legislature to create a new regulation for the period from 31.07.2022. The previous regime will therefore be replaced. Whether and to what extent this new regulation also applies retroactively can best be presented in several case groups.

No changes will occur for interest rates until 2013. This is mainly due to the fact that the BVerfG considers the interest rate until 2013 as still constitutional – although there are some doubts about this. Only from 01.01.2014 there is an unconstitutional nature of the interest rate.

The amount of interest due for the period 01.01.2014 to 31.12.2018 is unconstitutional according to the BVerfG. Despite the fact that the interest rate is unconstitutional, the tax notices issued for this purpose are not changed. Objections filed here are rejected (and suspensions of execution ended) and provisional notices in tax rulings are annulled.

For interest periods from 01.01.2019 until today, the new regulation will be decisive. The problem with this could be that the tax assessment has become both materially and formally valid. It is important here that the tax notices were appealed against or that the tax notices were issued with the provisional note. Without a possibility of correction (objection or provisionality), the tax assessments cannot be changed.

The BVerfG has given the legislature the task of introducing new regulations or regulations until 31.07.2022. create a review of the previous regulation. The prevailing opinion and suggestion in the literature is that the interest rate will in future be based on the basic interest rate of the Deutsche Bundesbank. The level of the interest rate would thus be flexible in order to adapt to the realities of the capital market. In short, this means that the interest rate of 6% will fall for interest periods starting from 01.01.2019.

On the one hand, taxpayers take advantage of this when paying back taxes, as the interest rate falls here and thus the total tax due. On the other hand, this is to the detriment of the taxpayer in the case of tax refunds; because while the refund was paid interest at 6% – so very high! – here the interest rate is reduced, which reduces the tax to be refunded.

Proceeding against earlier or open tax notices makes sense especially if you had a high tax back payment, which was interest paid. If possible, you should not attack tax refunds – the high interest rates benefited you.

Therefore, check whether you have benefited from the high interest rates – here you should secure the interest – or whether you had made a tax back payment, which was interest paid. You would have to attack the latter by objection or via the provisional note and thus change the interest rate on the future new regulation (pending the new regulation, therefore suspension of execution, rest of the procedure).