Interest on tax demands and refunds at 6% p.a. unconstitutional as of 2014
The BVerfG has ruled that the interest on back taxes and tax refunds in section 233a in conjunction with section 238(1) sentence 1 of the Fiscal Code is unconstitutional insofar as the interest calculation for interest periods from 01.01.2014 is based on an interest rate of 0.5% per month.
The charging of interest on back taxes at a monthly rate of 0.5% after the expiry of an interest-free grace period of basically 15 months constitutes unequal treatment of tax debtors whose tax is not assessed until after the expiry of the grace period compared to tax debtors whose tax is already finally assessed within the grace period. Measured against the general principle of equality under Article 3 (1) of the Basic Law, this unequal treatment still proves to be constitutional for interest periods falling in the years 2010 to 2013, but unconstitutional for interest periods falling in 2014. A less inequitable and at least equally suitable means of promoting the purpose of the law would be full interest with a lower interest rate. The incompatibility of interest pursuant to § 233a AO with the Basic Law also includes interest on refunds for the benefit of taxpayers. The previous law continues to apply for interest periods up to and including 2018. However, the provisions are inapplicable for interest periods falling in 2019 and later. The legislature is obliged to adopt a constitutional new regulation by 31 July 2022.
Facts of the case:
§ Section 233a AO regulates interest on back taxes and tax refunds. The interest applies to the period between the accrual of the tax and its assessment (principle of full interest). However, interest does not start to accrue at the end of the calendar year in which the tax arose, but only after an interest-free grace period of 15 months. Thus, only those taxpayers are affected by full interest whose tax is assessed or amended for the first time only after the expiry of a longer period after the tax claim arose. In this respect, (amended) tax assessments after an external audit are of particular practical significance. Pursuant to section 238 (1) AO, interest amounts to 0.5 % for each full month of the interest period, i.e. 6 % per year. Only the types of income tax, corporate income tax, net worth tax, turnover tax and trade tax listed exhaustively in section 233a, paragraph 1, sentence 1 AO are subject to interest. The full interest calculation works both in favour (in the case of a tax refund) and to the disadvantage (in the case of a tax demand) of the taxpayer. The reasons for a late tax assessment and, in particular, whether the taxpayer or the authority is at fault, are irrelevant for the interest calculation.
The constitutional complaints concern the assessment of interest on arrears pursuant to § 233a AO on trade tax after an external audit. The complainants object to the judgments of the specialised courts confirming the interest. Indirectly, they object to § 233a AO insofar as § 238.1 sentence 1 AO applies to the calculation of interest. The subject of the constitutional review is an interest period from 1 January 2010 to 14 July 2014.
Essential considerations of the Senate:
I. Interest on back tax claims under § 233a in conjunction with § 238.1 sentence 1 AO was originally constitutional. However, the provision is no longer compatible with Article 3(1) of the Basic Law insofar as the calculation of interest for interest periods falling in 2014 is based on an interest rate of 0.5% per month.
(1) Under current law, taxpayers whose tax is not assessed until after the expiry of the grace period are treated unequally compared to taxpayers whose tax is assessed within the grace period. Only the former are liable to pay interest. 2.
(2) The justification of this unequal treatment is measured according to stricter proportionality requirements.
a) The principle of equality under Article 3.1 of the Basic Law does not prohibit the legislature from making every differentiation. However, such differentiation must always be justified by factual reasons that are appropriate to the objective and the extent of the unequal treatment. Depending on the object of regulation and the characteristics of differentiation, different limits arise for the legislature, which can range from relaxed obligations limited to the prohibition of arbitrariness to strict requirements of proportionality. A stricter binding of the legislature can result from the respective rights of freedom affected. In addition, the constitutional requirements become more stringent the less available the characteristics to which the statutory differentiation is linked are for individuals. This general standard under equality law also applies to the selection of the object of interest (full interest pursuant to § 233a AO) and the determination of the interest rate (§ 238 AO).
b) According to these principles, stricter requirements of proportionality are to be applied here. It is true that the full interest at the expense of the taxpayer under §§ 233a, 238 AO essentially only affects the general freedom of action under Article 2.1 of the Basic Law. The freedom of property under Article 14 (1) of the Basic Law, on the other hand, is not affected from the outset because the imposition of an interest payment obligation does not affect the financial circumstances of the persons concerned so fundamentally that it has a strangling effect. However, the time of the tax assessment and thus the exceeding of the grace period are largely unavailable to the individual taxpayers. It is ultimately in the sphere of the tax authorities or – in the case of trade tax – as a rule also in the sphere of the municipalities, when the tax is assessed.
3 Section 233a in conjunction with section 238 (1) sentence 1 AO initially satisfied the stricter justification requirements to be applied here and was constitutional.
a) The objective of full interest to compensate for the fact that taxes are assessed and due at different times for the individual taxpayers is legitimate. The interest on back taxes is based on the assumption that tax debtors whose taxes are assessed late have a notional interest advantage. The purpose of full interest is to skim off this interest advantage. Full interest as such is also suitable to promote the achievement of this goal. In principle, this also applies taking into account the amount of the interest rate, since at least until 2014 it was still possible to regularly earn credit interest.
b) The full interest is also necessary as such. Neither the skimming off of the liquidity advantage actually achieved by the taxpayers nor a design of the full interest to the effect that interest on arrears is only charged in the case of a late tax assessment caused by the taxpayers themselves are equally suitable for achieving the differentiation purpose. Even insofar as the full interest rate is linked to a fixed interest rate, its necessity does not meet with any reservations. A variable interest rate does not per se cause less inequality than a fixed interest rate. 4.
However, the full interest rate of 0.5% per month is no longer necessary for interest periods falling in 2014 and violates the principle of equality under Article 3.1 of the Basic Law.
a) The legislature is in principle entitled to determine the interest advantage of the taxpayer achieved by a late tax assessment in a standardised manner for the purpose of administrative simplification. However, it may not choose an atypical case as a model, but must base its yardstick on the typical case in a realistic manner. Since the legislator has at no time explicitly justified the amount of the interest rate chosen, an overall view of the recognisable motives and considerations is necessary in order to determine the at least presumably guiding criteria in the assessment of the interest rate. The advantage compensation through full interest in the case of subsequent payment is based on the assumption of the legislator that the advantage to be skimmed off is a potentially accruing interest advantage. To determine this interest advantage at a monthly rate of 0.5%, the legislator in 1990 linked it to § 238 AO, which had already applied to the previous interest calculation provisions of the German Fiscal Code (Abgabenordnung). This was justified solely on the grounds of the practicability of the fixed interest rate. However, references to the discount rate at that time, which has been replaced by today’s base interest rate, are also recognisable. The legislator obviously still had the market interest rate in mind and a synchronisation of the amount of interest on arrears and interest on refunds. These criteria, which the legislator used as a yardstick when determining the interest rate, are appropriate in their entirety to reflect the potential advantage of a late tax assessment.
b) The full interest at the expense of the taxpayer with an interest rate of 0.5% per month was therefore initially constitutional. The legislature’s assumption that this interest rate reflected the potential advantage arising from a late tax assessment was correct in the year of the passing of the Tax Reform Act 1990, which introduced full interest into the Tax Code. With an annual interest rate of 6 %, the interest rate roughly corresponded to the conditions on the money and capital market, which were relevant as a yardstick in this respect.
c) Despite the legislature’s fundamental prerogative of assessment, the interest rate of 0.5% per month can no longer be justified if the interest rate set in a standardised manner proves to be manifestly unrealistic in the course of time under changed actual conditions. This has been the case since 2014 at the latest.
After the outbreak of the financial crisis in 2008, a structural low interest rate level has developed that is no longer an expression of normal interest rate fluctuations. This is initially reflected in the development of the base interest rate. While it was still over 3% in 2008, it dropped rapidly to 0.12% in the course of 2009. Since January 2013, it has been in negative territory. Against the background that in the fifty years of its existence the discount rate has ranged between 2.5 % and 8.75 % and the base rate before 2009 between 1.13 % and 3.32 %, this development shows a low interest rate level that is no longer an expression of usual interest rate fluctuations, but since 2014 at the latest has been of a structural and sustainable nature. The development of interest rates on the capital market shows a corresponding trend. In 2014, the annual 6 % interest rate had already moved so far away from the actual market interest rate level that it was already roughly twice the highest credit interest rate that could still be achieved. The lending interest rates to be taken into account as a yardstick also followed the downward trend shown above. The typical interest rate of 6% per annum has therefore proven to be evidently unrealistic since 2014 at the latest under the changed actual conditions after the outbreak of the financial crisis. In the increasingly low interest rate environment, it is obviously no longer capable of adequately reflecting the potential advantage arising from late taxation. With its linkage to an annual interest rate of 6 %, the full interest rate thus generally has an excessive effect at the latest for interest periods falling in 2014 and has thus become unconstitutional. 5.
5 For interest periods falling into 2013, the statutory interest rate is increasingly less able to reflect the purpose of collecting interest on arrears. However, the full interest rate does not have a manifestly excessive effect in this respect. Nor is it disproportionate in the narrower sense. A constitutionally conspicuous disproportion does not yet exist in this respect. The prohibition of excessiveness derived from Article 2 (1) in conjunction with Article 20 (3) of the Basic Law is not violated in this respect either. The advantages of the rigid interest rate determined by type in administrative practice are still in proportion to the unequal treatment of the taxpayers liable to pay interest associated with it. By 2013, the low interest rate level had not yet solidified to such an extent that the statutorily determined interest rate appears to be evidently unrealistic as a rule.
II. the constitutional complaint re I. in the proceedings 1 BvR 2237/14 is – insofar as it is admissible – unfounded, because it concerns an interest assessment for the period from 2010 to 2012.
III. the constitutional complaint re II. in the proceedings 1 BvR 2422/17 is partly well-founded. Insofar as it concerns the interest period from 1 January 2014 to 14 July 2014, the decision of the Administrative Court violates the complainant’s fundamental right under Article 3.1 of the Basic Law. The decision of the Administrative Court violates her fundamental right to effective legal protection under Article 19.4 of the Basic Law. Apart from that, the constitutional complaint is unfounded.
IV. In conclusion, § 233a in conjunction with § 238.1 sentence 1 AO is declared to be incompatible with the Basic Law comprehensively and for all interest periods from 1 January 2014. Due to the uniform regulatory concept of the legislature, the incompatibility of interest pursuant to section 233a AO is not limited to interest on arrears at the expense of taxpayers, but also includes interest on refunds for the benefit of taxpayers. However, for interest periods from 1 January 2014 to 31 December 2018, the provision continues to apply without the legislature being obliged to retroactively create a constitutional provision for this period as well. For interest periods falling in 2019 and later, however, the provision remains inapplicable. In this respect, the legislature is obliged to adopt a new regulation by 31 July 2022 that retroactively extends to all interest periods from 2019 onwards and covers all sovereign acts that have not yet become final.
Source: Press release of the BVerfG No. 77/2021 of 18.08.2021