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Reductions in interest on back taxes and tax refunds in Germany – Benefitting your business?

03 June 2022 | Germany
Legal Briefings – By Steffen Hoerner, Wladimir Leonhard and Tatiana Guenster

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We analyse the impact as Germany slashes interest owed on outstanding tax payments

The German parliament is likely to soon pass new rules regarding interest charged on taxes for the period between when the tax is incurred and assessed.

Currently, interest begins to accrue after a grace period of usually 15 months (which has temporarily been extended during the Covid pandemic). In the past, interest was assessed at a rate of 6% per annum (0.5% per month), and the same rate generally applied to tax refunds.

WHAT ARE THE NEW RULES?

On 18 August 2021, the German Federal Constitutional Court (Bundesverfassungsgericht) decided that the interest rate of 6% was unconstitutional and required the German legislature to draw up new rules on the basis of a reduced interest rate by the end of July 2022. The German government is currently considering the following new rules:

  • The interest rate has now been reduced from 6% per annum (0.5% per month) to 1.8% (0.15% per month). This applies in particular to income tax (Einkommensteuer), corporate tax (Körperschaftsteuer), trade tax (Gewerbesteuer) and value-added tax (Umsatzsteuer).
  • The reduced interest rate applies retroactively to interest periods starting on 1 January 2019 to interest on back taxes (Nachzahlungszinsen) and interest on tax refunds (Erstattungszinsen). There is no change to the interest rate for periods up to 31 December 2018.
  • The reduced interest rate applies to all cases which are still open for (re-)assessment. However, if taxpayers have already received tax refunds on the basis of the previous interest rate of 6% they are not required to repay interest amounts relating to the time until the decision of the German Federal Constitutional Court in 2021.
  • However, interest on deferred taxes (Stundungszinsen), interest in respect of tax evasion (Hinterziehungszinsen) and interest accruing while the enforcement of the relevant tax has been suspended (Aussetzungszinsen) will still be levied on the basis of 6% per annum. Taxpayers will need to take this into account when considering whether to apply for a suspension of execution during an appeal or tax court proceedings.

Going forward, the German legislature is held to review the interest rate every three years, first time being on 1 January 2026 and amend the interest rates if the base rate (Basiszinssatz) has changed by more than one percentage point.

OUTLOOK FOR BUSINESS

The reduction of the interest rate was overdue and is positive for taxpayers. However, the German legislator did not take up the suggestion by some taxpayers and advisers to suspend the accrual of interest during tax audits.

HSF German partner Steffen Hörner comments "Taxpayers should review their tax assessment notices and make sure that the tax authorities apply the lower interest rate to the extent assessments have not yet become final and binding. It is important to note, however, that the rate of interest accruing while the enforcement of the relevant tax has been suspended has not been reduced and taxpayers will need to take this into account when considering whether to apply for a suspension of execution during a tax dispute."

For more information please get in touch with our German tax team.

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