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
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
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
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.
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