Interest Rate on Tax Arrears Declared Unconstitutional

In a long-awaited judgment, the Federal Constitutional Court has ruled that interest of 6% per annum / 0.5% per month on tax arrears and tax refunds is unconstitutional.

Section 233a of the Fiscal Code (AO) governs the charging of interest on tax arrears and tax refunds. The principle of full interest accrual applies, meaning that interest covers the period between the arising of the tax liability and its assessment (ordinarily by means of a tax assessment notice). However, interest does not begin to accrue until after a 15-month interest-free grace period has elapsed.

This means that the full interest accrual provisions only affect those taxpayers whose tax is assessed for the first time, or reassessed, after the grace period has expired.

The Federal Constitutional Court considers the monthly interest rate of 0.5% to constitute an unequal treatment of taxpayers whose tax is assessed after the grace period has expired, compared with those whose tax is assessed within the grace period. The underlying reason is the contrast between the persistently low interest-rate environment and the 6% annual rate charged by the tax authorities.

The Federal Constitutional Court considers this unequal treatment to be consistent with the constitution for interest periods up to and including 2013. From 2014 onwards, however, interest on tax arrears and tax refunds is unconstitutional.

At the same time, the Federal Constitutional Court declares the existing law to remain applicable for interest periods falling within the year 2018 or earlier. Only for later interest periods does the continuation of the existing legal position cease to be permissible.

The legislature has furthermore been required to enact new legislation by 31 July 2022.

For interest periods up to and including 2013, the unconstitutionality finding does not apply. Any objections (Einsprüche) lodged are likely to be dismissed.

The interest periods from 2014 to and including 2018 are unconstitutional; however, the existing legal position remains applicable. Here too, dismissal of objections and removal of the provisional note must be anticipated.

The unconstitutionality finding applies only to interest periods from 2019 onwards. This means that, in particular for tax assessments from 2019, care must be taken to ensure that an objection has been lodged against the interest assessment notice or that the assessment has been made on a provisional basis with regard to the level of interest.