Germany: German Federal Tax Court questions constitutionality of interest deduction limitation rule

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Germany: German Federal Tax Court questions constitutionality of interest deduction limitation rule

Linn
Braun

Alexander Linn

Thorsten Braun

Germany's Federal Tax Court (BFH) referred a case to the Federal Constitutional Court (BVerfG) on February 10 2016 requesting a ruling on whether the interest deduction limitation rule violates the constitution (case ref. I R 20/15).

Introduced as part of the 2008 corporate tax reform, the rule restricting the deduction of interest applies to both shareholder loans and bank loans (that is, loans from related and unrelated parties). The rule limits the deduction of net interest expense (interest expense exceeding interest income) to 30% of the tax EBITDA. There are very limited exceptions to the rule, and its basic features are reflected in the OECD's BEPS Action 4 ('Limiting Base Erosion Involving Interest Deductions and Other Financial Payments') and in the European Commission's draft proposal for an anti-avoidance directive (COM(2016) 26 final).

The BFH initially expressed its doubts about the constitutionality of the interest deduction limitation rule in a decision issued in 2013 (case ref. I B 85/13 dated December 18 2013). However, the final decision on the constitutionality of the measure must be made by the BVerfG. Until this question is decided – which likely will take a few years – the tax authorities can continue to disallow full interest deductions based on the existing rule. Therefore, tax assessments should be kept open. Although the tax authorities likely will continue to apply the rule, tax assessments may be issued on a preliminary basis that would keep assessments open until the BVerfG issues its decision.

Should the BVerfG rule in favour of the taxpayer, a tax refund would trigger interest at 6% per annum, with the interest period starting 15 months after the relevant fiscal year. However, if the BVerfG determines that the interest deduction limitation rule is in line with the constitution, any preliminary tax assessments would become final.

Alexander Linn (allinn@deloitte.de) and Thorsten Braun (tbraun@deloitte.de)

Deloitte

Tel: +49 89 29036 8558 and +49 69 75695 6444

Website: www.deloitte.de

more across site & shared bottom lb ros

More from across our site

New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Indirect tax professionals now rate compliance as a bigger obstacle than technology and automation; in other news, Italy approved a VAT cut on art sales
AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
A ‘joint understanding’ among G7 countries that ‘defends American interests’ is set to be announced, Scott Bessent claimed
The ‘big four’ firm’s inaugural annual report unveiled a sharp drop in profits for 2024; in other news, Baker McKenzie and Perkins Coie expanded their US tax benches
Gift this article