Judgment in Karlsruhe: Six percent tax interest is unconstitutional

Interesting rates worth mentioning have been practically nowhere else for a long time, as savers know from painful experience.

Only the tax authorities are sticking to their tax rate of 6 percent a year, which they set decades ago.

Wrongly, as the Federal Constitutional Court in Karlsruhe has now decided.

In view of the ongoing low interest rate phase since 2014, the high interest rate is unconstitutional.

This applies to both interest on back tax payments and tax refunds, the court said.

Money back is only available until 2019 - from this year the Constitutional Court ordered a retroactive correction (file number 1 BvR 2237/14 etc.).

The decision could make itself felt on a number of accounts: We answer the most important questions.

What is tax interest?

Tax office interest may be due for back tax payments and refunds, usually if the assessment is delayed by more than 15 months.

Unlike the late payment surcharge for late tax returns, the interest is not intended as a punishment.

The background to this is that all taxpayers should be burdened equally.

If part of the tax is only paid in retrospect or if taxes that have been paid too much remain with the tax authorities for a long time, this principle is disrupted.

The interest is intended to offset the profits that could have been made with the money in time.

They are specified in the tax assessment.

The taxpayer benefits from reimbursements and the tax authorities from additional payments.

Why is interest rate a problem?

A long time ago, in 1961, the uniform interest rate was set at 0.5 percent per month, which corresponds to 6 percent per year.

Since then, the legislature has not changed anything about this - not even in the now long historical phase of historical low interest rates.

The interest rate therefore has nothing to do with the reality on the capital market: Profits are being skimmed off that cannot be achieved at the moment, critics complained.

It's a fine thing for those who get the interest - but the other pays on it.

What are the practical implications?

Above all, companies that pay high sums of taxes have to fear drastic additional claims.

Two companies have sued in Karlsruhe whose trade tax had been revised upwards significantly after a tax audit.

In one case, the interest to be paid increased from 423 euros to more than 194,000 euros.

The second procedure also involves a six-figure amount.

For private taxpayers, the sums are much smaller.

But even there, the interest rate can be disproportionately high.

What is the significance of the Karlsruhe decision?

At the Taxpayers' Association (BdSt) one expects a “huge broad impact”.

Because the interest rate also applies to income, corporate, wealth and sales tax.

In 2009, Karlsruhe had declared the regulation in the tax code to be constitutional.

But meanwhile the phase of low interest rates has lasted so long that the Federal Fiscal Court (BFH) turned around in 2018 and expressed "serious doubts about the constitutionality" for interest periods starting in 2015.

Finally, court proceedings were suspended - everyone was waiting for the Constitutional Court.

Now it is said from Karlsruhe: The previous regulations will be inapplicable from 2019.

The highest German judges told the legislature to make a new regulation by July 31, 2022.

What does that mean for taxpayers?

Due to the unclear legal situation, the tax authorities have only set the interest rates provisionally in all notices since May 2019.

After the decision, your amount could now be corrected retrospectively.

If you paid too much interest, you would get your money back.

The reverse is also likely to apply: Anyone who was happy about a tax refund with generous interest rates might have to pay something back.

What sums is it for the tax authorities?

In the past, the state has made good business with high interest rates. Between 2010 and 2018, the income from the interest on arrears was always higher than the sum of the interest that the federal, state and local governments had to pay on reimbursements. In some years the difference was more than a billion euros. Upon request, the Federal Ministry of Finance announced that it would, if necessary, “discuss the consequences of the decision with the highest tax authorities of the federal states and propose any new regulations to the legislature”.