German court rules high interest on tax repayments ‘unlawful’

German court rules high interest on tax repayments 'unlawful'
The Constitutional Court, which came to its decision on the tax interest rates on Wednesday morning. Photo: picture alliance/dpa | Sebastian Gollnow
Judges at the Constitutional Court in Karlsruhe have ordered the German tax office to return interest payments to taxpayers after it found that Germany's interest rates on taxes were "out of step with reality".

The decision will affect those who have postponed their tax payments by more than 15 months since 2019, or who have received rebates for overpaid taxes that were also delayed by 15 months in the past few years.

Though interests rates have plummeted since the financial crisis, the German tax office has continued to add levies to tax repayments at the rate originally set in 1961.

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For six decades, taxpayers who delay their repayments by more than a year and a quarter have had to repay an additional 0.5 percent interest per month on top of their tax – amounting to six percent interest per year.

After the financial crisis, however, German businesses complained that the system was unbalanced, since the interest rates were intended to compensate from the profit that could have been made on the same sum of money in that time. 

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However, with interest rates dropping to a historic low globally in the years following the crisis, there was no longer any chance of making profits that could counterbalance the six-percent rate of interest.

In its ruling on Wednesday morning, the court in Karlsruhe – which decides on matters related to the German constitution – declared the six-percent interest rates “unlawful”. 

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The decision applies retroactively to all tax returns submitted since 2019 – but only those that haven’t been finalised yet – meaning people who’ve delayed their repayments since then won’t have to pay interest on top of their tax.

But the tax offices aren’t the only party that may end up out of pocket: taxpayers who have received interest on overpaid tax repayments since 2019 could also be asked to return the money they’ve been given. 

‘Evidently unrealistic’

Though the decision of the Karlsruhe judges applies to tax returns from 2019 onwards, the judges stopped short of mandating repayments as far back as 2014.

General interest rates had already plummeted in the years leading up to 2013. At that time, however, the interest rate was “still in the right proportions,” to the wider economic context, it said. Since 2014 at the latest, however, it has been “evidently unrealistic”.

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In 2018, the Federal Fiscal Court had also questioned the constitutionality of the high interest rates.

Because of these decisions and the unclear legal situation, the tax offices have only made provisional interest assessments on tax returns since May 2019. This means that the assessments can now be changed retrospectively.

Furthermore, the authorities had provisionally waived the collection of interest in certain cases.

Two companies had originally raised the case in Karlsruhe after their trade tax had been significantly adjusted upwards following a tax audit. In one case, the interest to be paid increased from €423 to more than €194,000.

Because this involved periods between 2010 and 2014, however, only one of these challenges was successful.

Now lawmakers will have until July 31st, 2022, to decide on a new rate of interest that better reflects interest rates levied by banks and other financial institutions.

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