Tax Advisor Explains: The End of High Tax Penalties

Interest must be paid on back taxes and tax refunds that are paid late. Paying interest is not unusual in itself and is normal in many areas of life. However, while interest rates on the open capital market have been at record lows for many years, they have not been adjusted to market levels with regard to late tax payments. At 6% per year, tax interest rates are significantly higher than standard capital market rates. Criticism of the high tax interest rates has been around for a long time. Now, the Federal Constitutional Court has issued a ruling that will impact tax interest rates. Below, we’ve summarized everything you need to know about this.

When is tax interest due?

First, we need to briefly explain the basics. With regard to taxes, interest becomes due starting from the 15th month after the end of the respective tax year. This applies to back taxes that you, as a taxpayer, must pay to the tax authorities, but also to tax refunds that you receive from the tax office. For each month after the aforementioned period, 0.5% is due. Over the course of a year, this amounts to the aforementioned 6%.

At least, that has been the rule so far. This comparatively high rate has not changed in 60 years. In today’s world, it is likely to be seen as unrealistic by most people. It is therefore not surprising that there is repeated criticism and discussion on this matter. But now, a recent ruling by the Federal Constitutional Court is bringing about a change in this regard.

What does the Federal Constitutional Court’s ruling entail?

The ruling by the Federal Constitutional Court was preceded by a lawsuit filed by two business owners. Due to a back tax payment, the business owners would have had to pay interest in the six-figure range. In the context of this dispute, the Federal Constitutional Court ultimately issued a ruling. According to the ruling, the 6% tax interest rate has been unconstitutional since at least 2014.

The question now arises as to what the new tax rate will be and exactly what the new regulation will look like. This is not specified in the ruling. The Federal Constitutional Court merely determined that the current situation is unconstitutional and requires a change. The court does not typically address further details. However, the legislature has been required to enact new regulations by July 31, 2022. What these will ultimately look like is not yet clear.

Who will be affected by the change?

Although it is not yet known what the new interest rate will be, we can take a look at who this will actually affect. Although the ruling states that the current situation has been unconstitutional since 2014, all tax liabilities up to and including 2018 will remain in effect. So nothing will change retroactively for those years. However, the upcoming change affects everyone who has paid or received interest on taxes starting in 2019. This is good news for anyone who paid interest to the tax office during that period. It should also be noted, however, that tax refunds with interest may also be subject to adjustment. Anyone who already knows that they received a refund for the period described should keep a potential adjustment payment in mind. Only time will tell to what extent this will actually be due.

In addition to these retroactive changes, the new regulation will of course also apply going forward, which should reduce costs for both parties.

Tax Consulting in Düsseldorf and Oberhausen

This specific case from the world of taxes shows that it is important to stay up to date so as not to be caught off guard by changes. In particular, individuals who may have to repay interest to the government should find out about this early on. To protect yourself properly, you should have a qualified tax advisor by your side. Are you still looking for the right tax advisor? With our offices in Düsseldorf and Oberhausen, we are the ideal partner for all tax-related matters. Contact us to schedule a consultation.