BFH doubts the constitutionality of statutory interest rate on tax arrears

By order of 25 April 2018 (docket-no. IX B 21/18), the Bundesfinanzhof (BFH) ruled that the amount of the statutory interest rate on tax arrears in Section 233a, 238 of the General Tax Code (AO) is unconstitutional from the year 2015 onwards. Consequently, the court relieved the taxpayer to pay the interest immediately by granting suspensory effect of the appeal. The statutory interest rate on tax arrears amounts to monthly 0.5% (6% p.a.) of a tax to be paid or refunded. This rate deviates significantly from current market interest rates. Against this backdrop, the BFH voiced serious doubts as to whether the statutory interest rate meets constitutional requirements. By way of contrast, at the end of last year the BFH still had rejected the argument that said interest rate was unconstitutional in relation to years until 2013 (BFH dated 9.11.2017, docket-no. III R 10/16).

Statutory interest rate of 6% is remote from reality

In the context of a tax dispute, the tax office increased the income tax payable by a married couple for the year 2009 by approximately € 2 million. In addition, the tax office assessed interest on tax arrears of approximately € 240,000 for the period from 1 April 2015 to 16 November 2017. The couple objected to the increase in income tax by way of administrative appeal. Moreover, they requested to be relieved to pay the interest immediately by reinstating the suspensory effect of their appeal, since the interest rate of 0.5% per month was unconstitutional.

Contrary to the legal view held by the tax office and the tax court, the BFH granted suspensory effect of their appeal in favor of the taxpayers. In doing so the court voiced serious doubts as to the constitutionality of Section 233a, 238 (1) sentence 1 AO with regard to the interest for periods from the year 2015 onwards. The BFH justifies its order with the unrealistic amount of the statutory interest rate on tax arrears, which – in the view of the court – violates the general principle of equality under Article 3 (1) of the German Constitution. This is because the statutory interest rate significantly exceeds the reasonable scope of the economic reality in times of continuously low level market interest rates.

Moreover, in the view of the BFH there is no factual justification for the statutory interest rate on tax arrears. According to the court, due to the modern data processing technology considerations such as practicability and administrative simplification cannot be used to argue against the need to adjust the interest rate, which has remained unchanged since 1961, to the respective market interest rate or the basic interest rate in Section 247 of the Civil Code. Hence, in the view of the BFH there is a lack of sufficient justification for the amount of the interest rate. This is further underpinned by the purpose of the tax arrears interest. This purpose consists in at least partly “skimming off” the interest benefit resulting from the fact that the tax is paid later. However, in the current situation of the structural low interest rate level, the amount of statutory interest payable on additional taxes  goes far beyond the rates which would be achievable in the market.

In the view of the BFH, constitutional doubts exist also with regard to the prohibition of disproportionate measures under Article 20 (3) of the German Constitution. According to the court, the unrealistic assessment of the interest rate in times of a structural low interest rate could constitute an unsubstantiated surcharge on the income tax. Finally, the BFH established that it is the constitutional duty of the law maker to check whether the original decision on the statutory interest rate on tax arrears can still be maintained even if the low interest rate level are permanent.

BVerfG must decide on unconstitutionality

The additional revenue generated by the statutory interest rate on tax arrears in favor of the tax authorities in recent years amounted to more than € 2 billion. The Federal Constitutional Court (BVerfG) will soon have to decide whether this source of revenue of the tax authorities meets constitutional requirements. Respective actions in relation to the years from 2010 are already pending at the BVerfG (docket-nos. BvR 2237/14 and 1 BvR 2422/17).

Should the BVerfG determine the unconstitutionality of the statutory interest rate on tax arrears, the legislature would be forced to reduce the rate, which has been demanded already for quite some time.

For taxpayers whose interest assessment notices are not final, a favorable decision of the BVerfG could lead to substantial reimbursements of unduly levied tax interest. Furthermore, burdening interest assessment notices should be objected by way of administrative appeal and thus kept open. On the basis of the recent order of the BFH, taxpayers should also apply for the suspensory effect of their administrative appeals to be reinstated by the tax authorities or the courts until the BVerfG has finally ruled on the constitutional law questions.