German default interest rate with tax debts unconstitutional?

Suspension of execution for interest periods since April 1st 2012 now possible upon application to tax authorities


 The German statutory default interest rate for outstanding tax liabilities is 0.5% a month and thus equals 6% a year. In two proceedings for interim relief heard in 2018, the Federal Fiscal Court (BFH) expressed doubts as to the constitutionality of this interest rate for interest periods since April 1st 2012. The BFH considered the rate unrealistic. In BFH’s view, the rate violates the general principle of equality enshrined in the German Federal Constitution (Grundgesetz), since it considerably exceeds the appropriate framework of economic reality. The Federal Ministry of Finance reacted in December 2018 with a circular letter which made it possible to suspend enforcement of default interest accumulated over the periods in question.

 However, suspension does not take place automatically. Taxpayers affected must contest (or must have contested) their tax assessment notice as to accumulated interest in due time, i.e. within one month of receipt. Also, taxpayers must actively apply for suspension of enforcement with the competent tax authority. Beyond the scope of German tax law, this development is also interesting because the German statutory default interest rate for outstanding social security contributions is 1% a month and thus equals 12% annually. Here, deviations between the interest rate and economic reality appear even more striking. Whether the courts in Germany will raise concerns about these rates, too, is a highly interesting legal question for the future to decide.

Source: BFH, IX B 21/18 and VIII B 15/18, Par. 233 a and Par. 238 German Taxation Ordinance (AO)

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