Interest rate on tax arrears to remain at 0.5% per month for the time being

Given that we are in a phase of persistently low interest rates, for a long time now, there has been a debate on the issue of the constitutionality of the statutory level of the interest rate of 0.5% for each full month payable on tax arrears. In 2018, the Federal Fiscal Court (Bundesfinanzhof, BFH) expressed considerable misgivings, in terms of compatibility with constitutional law, against the interest rate level pursuant to Section 238(1) of the Fiscal Code (Abgabenordnung, AO) and granted a suspension of the operation of interest (BFH from 25.4.2018, case reference: IX B 21/18; from 3.9.2018, case reference: I B 15/18).

Recently, to address this problem, an application was filed by the FDP parliamentary group in the Bundestag (lower house of German parliament) for the amendment of the interest rate in accordance with Section 238(1) AO. The application was for the interest rate on tax arrears to be amended to a realistic level. Here, the draft proposal included a change in the amount of one twelfth of the base monthly rate of interest, within the meaning of Section 247 of the German Civil Code, but at least 0.1% per month. Nevertheless, the Federal government continues to adhere to the current rate of interest. To substantiate this, the Finance Committee explained that, for the interest rate on tax arrears, the Federal government is guided not by market interest rates but, instead, by the rates of interest charged for defaults and overdrafts. Therefore, it does not agree with the BFH’s criticism of the interest rate level.

Please note: It is nevertheless recommended to keep appeal proceedings open, particularly as the reason given by the Federal government to justify the interest rate level, namely that this is based on the rates of interest charged for defaults and overdrafts, contradicts the view of the BFH. While the annual preview of the Federal Constitutional Court gives some hope that there will still be a ruling this year on the constitutionality of the interest rate for assessment periods after 31.12.2009 or after 31.12.2011, yet, an imminent and overdue adjustment of the text of the law to reflect the actual economic conditions is however once again receding into the distant future.