According to a decision published February 10, 2016, the German Federal Fiscal Court submitted to the Federal Constitutional Court the question whether or not the interest barrier rule is unconstitutional (I R 20/15). Already in its resolution of 18/12/2013 (I B 85/13) the Federal Fiscal Court had expressed doubts about the constitutionality of the interest barrier rule. On 13/11/2014, the Federal Ministry of Finance had issued a non-application ruling to that court resolution.

Since 2008, the interest barrier rule generally limits the tax deductibility of interest expense – irrespective of whether bank loans or shareholder loans are concerned – to 30% of the tax EBITDA and only allows for few exceptions.


The final decision on whether the interest barrier rule violates the constitution now lies with the Federal Constitutional Court. It may take a few years until this Court will decide. Tax assessments need to be kept open.

Until the Federal Constitutional Court's decision is made, the tax administration may keep assessing taxes by applying the interest barrier rule and may still deny full interest deduction. It can be assumed, however, that all tax assessments with respect to the interest deduction will be "preliminary", i.e. subject to changes in favor of the taxpayer in case the Federal Constitutional Court should hold the interest barrier rule retroactively to be in violation of the constitution.

Should the Federal Constitutional Court, however, decide that the interest barrier rule either does not violate the constitution or that it should continue to apply although being unconstitutional until it is reformed, the tax assessments take binding effect.

In case taxes are assessed with limited interest deduction, although preliminary only, taxes assessed on this basis will become payable. A tax refund later (because the limited interest deduction turns out to be unconstitutional) earns 6% interest in favor of the taxpayer with the interest period starting 15 months following the respective fiscal year.

To avoid the immediate tax payment to the extent triggered by the application of the interest barrier rule, the taxpayer may apply for stay of execution of the taxes assessed. We assume – despite controversial case law in this context – that the tax administration will accept the applications for stay of execution. The tax administration runs a significant interest exposure itself. The judicial decision on granting the stay of execution would finally be with the same senate at the Federal Fiscal Court, which currently held the interest barrier rule to violate the constitution.

The outcome of the case pending at the Constitutional Court is unpredictable. Should the court hold the interest barrier rule to be in line with the constitution, the "only" question left is, whether in special situations the interest barrier rule may be interpreted in line with the constitution in a way which allows for broader or unlimited interest deduction or whether the tax administration's view on the rule is always to be followed. The final decision on these questions will then lie with the fiscal courts only.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.