Interest on tax refunds and on tax arrears – Reduction in the interest rate to 1.8% per year

In a previous issue we already had a report on a ruling by the Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) where interest on tax arrears and tax refunds of 6% per year was classified as being unconstitutional. With the draft of the Second Act Amending the German Tax Code, of 30.3.2022, the German Federal Cabinet has initiated the reduction in this interest rate to 0.15% per month, or 1.8% per year.

New regulation pertaining to the interest rate

The new regulation will apply retroactively from 1.1.2019 to all open cases of interest on tax arrears and on tax refunds. Accordingly, the interest rate should be reduced to 0.15% per month (= 1.8% per year) – (this is currently still 0.5% per month or 6% per year). Furthermore, the regulation stipulates that this new interest rate has to be evaluated for appropriateness at least every three years taking into account developments in the basic rate of interest with effect for subsequent interest periods. Therefore, it would have to be reviewed for the first time by 1.1.2026 at the very latest.

Further procedure

The amendment to the legislation solely affects interest on tax arrears and on tax refunds not, however, interest on deferred taxes, evaded taxes or suspended taxes nor on interest relating to judicial proceedings. The definitive implementation of the lower interest rate still requires the Bundestag (lower house of the German parliament) to pass the legislation (planned for 24.6.2022) as well as the Bundesrat to give its approval (planned for 8.7.2022).

Please note: As soon as the Bundesrat has given its approval and the legislation has been adjusted accordingly, it is likely that a large number of tax assessment notices where the interest assessment had hitherto been set ‘to zero’ in reference to the ruling by the BVerfG, or was still provisional, will be adjusted by the tax office.