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


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 ( and Thorsten Braun (


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