Germany – Interest rate of 6% p.a. unconstitutional since 2014  but only to be re-regulated for years from 2019 onwards

According to the Federal Constitutional Court (Bundesverfassungsgericht, BVerfG), the interest rate for interest on back payments, but also on interest on refunds, has been unconstitutional since 2014.unconstitutional if an interest rate of 0.5% per month is applied. However, the legislature is only obliged to act for 2019 and later years – nothing nothing changes for earlier years.

The BVerfG sees a violation of the principle of equality: taxpayers whose final tax assessment usually takes place only after the expiry of the waiting period (usually 15 months after the end of the calendar year in which the tax arose) were treated unequally compared to those whose final assessment takes place before the expiry of this period, because only the former are liable to pay interest. As far as the justification of the unequal treatment was concerned, stricter requirements were to be applied here. The aim of full interest payment was legitimate; however, the interest rate, although previously constitutional, had become manifestly unrealistic by 2014 at the latest. The unconstitutionality of the interest rate extended to interest on arrears as well as interest on refunds (§ 233a AO in conjunction with § 238 para. 1 sentence 1 AO). For the years 2014 to 2018, the previous provision continued to apply despite its unconstitutionality, as the legislature was not obliged to retroactively create a constitutional provision in this respect, but the previous provision was inapplicable for interest periods from 2019 onwards. In this respect, the legislature was obliged to adopt a new provision by 31 July 2022.

special case

In the case of turnover tax, however, the question arises as to how far (under the further conditions) interest on arrears is compatible with EU law. It is true, as the ECJ has stated, that interest is a matter for the Member States in the absence of relevant Union law provisions with regard to the modalities. However, the Member States must observe the principles of Union law, such as the neutrality of VAT and effectiveness. Violations of these principles have not gone unchallenged on previous occasions: in the “Senatex” ruling, for example, the ECJ has already ruled that the charging of interest on arrears was not compatible with the principle of neutrality – specifically, it concerned interest on an input tax deduction that had been claimed too early (because, in the opinion of the tax authorities at the time, it was not possible to correct the invoice retroactively). As far as can be seen, the ECJ has not yet issued a decision that explicitly allows this conclusion on the question of whether interest on arrears in the amount objected to by the BVerfG, which is far removed from reality (and indeed also for years prior to 2019), can be challenged under EU law – however, based on this and other case law, it is probably not impossible that it could take this view.

In case of any questions or for further information please contact Frank Gehring, frank.gehring@pwc.com.

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