Germany: German Federal Tax Court questions constitutionality of interest deduction limitation rule
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

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 & bottom lb ros

More from across our site

Attendees will meet for a networking dinner before a series of in-depth, practical discussions on pillar two, TP, ESG and more
Australian advisers should tread carefully when using new reporting obligations to complain about peers, Tax Practitioners’ Board chairman Peter de Cure tells ITR in an exclusive interview
As German clients attempt to comply with complex cross-border rules, local advisers argue that aggressive tax authorities are making life even harder
Based on surveys covering more than 25,000 in-house lawyers, the series provides insights into what law firms must score highly on when pitching to in-house counsel
The UK tax authority reportedly lost a case due to missing a deadline; in other news, Canada has approved pillar two legislation
There will always be multinationals trying to minimise tax by pushing the boundaries of their cross-border arrangements, Rob Heferen claimed
HMRC’s attempts to crack down on fraudulent tax relief claims are well-meaning, but the agency risks penalising genuinely innovative businesses, writes Katy Long of ForrestBrown
Argentina, Brazil, Mexico and South Africa are among the countries the OECD believes could benefit from the simplified TP rules
It comes despite an offshore enabler penalty existing in the UK throughout the entire period
It is extraordinary that tax advisers in the UK can offer their services without having to join a professional body. This looks like it is coming to an end, Ralph Cunningham writes
Gift this article