Interest on tax refunds and tax payments

To prevent citizens from holding back their tax returns for an unnecessarily long time in order to postpone an expected high final payment to the tax office, interest is charged on tax payments at a rate of 6% per year (0.5% per month) in accordance with the rules of the Tax Code. The interest period begins 15 months after the end of the year in which the tax arose - i.e. for the 2021 assessment period on April 1, 2023. If a tax assessment notice with a tax payment is issued after this date, the taxpayer must pay the tax office - in addition to the tax back payment - an additional 6% interest p.a.

Note: By charging this interest, the tax authorities intend to compensate any liquidity advantages that the taxpayer may have when the tax is assessed at a later date. Unfortunately, the interest also applies if the tax office itself is delaying the processing of the tax return. On the other side tax refunds also accrue interests at 6% per year. Taxpayers therefore receive this high interest from the tax office if a tax refund is issued that late.

In a much-noticed ruling, the German Federal Constitutional Court decided in July 2021 that the interest rate of 6% per year on tax refunds and tax payments is unconstitutional from 2014 onwards. The constitutional judges argued that the low level of interest rates on the capital market, which had persisted for years, was no longer compatible with the interest rate of 6% per year. Although the German Federal Constitutional Court decided that the interest rate was unconstitutional for interest periods from 2014 onwards, it still declared the previous law applicable for interest periods up to and including 2018. Only for interest periods from 2019 and later, the legislator was requested by the court to establish a new constitutional regulation by July 31, 2022.

As a result of this decision, the German cabinet passed a draft legislation in March 2022 that contains a retroactive new regulation for all open cases: According to this, the interest rate on tax payments and tax refunds is to be reduced to 0.15% per month (=1.8% per year) from the interest period beginning on 01.01.2019. In addition, it is stated that the appropriateness of this new interest rate must be evaluated, taking into account the development of the base interest rate, at least every three years with effect for subsequent interest periods - an initial review must therefore take place no later than January 1, 2026.