German Federal Tax Court deems that German interest barrier is unconstitutional and refers to the Federal Constitutional Court.

According to German interest barrier rules (sec. 4h German Income Tax Act and sec. 8a German Corporate Income Tax Act) interest expenses exceeding interest income can only be deducted for tax purposes up to 30% of a company’s earnings before interests, taxes, depreciations and amortization. Exceeding interest expenses can only be deducted if specific exceptions apply. Non-deductible interest expenses can be carried forward and can be deducted in future years if the interest barrier does not apply in the respective future year.

Yesterday the German Federal Tax Court published a decision that the interest barrier is an offence against the principle of equal treatment pursuant to Art. 3 para. 1 of the German Constitution. This finally has to be decided by the Federal Constitutional Court. In the view of the German Federal Tax Court the interest barrier is in violation of the net income principles.

The German Federal Tax Court in decisions regarding the application for interim relief in 2012 and 2013 indicated the unconstitutionality of the German interest barrier. The German Federal Ministry of Finance thereafter issued a non-application exemption for such judgement due to the public interest of sound administration, budget management and supervision.

It remains to be seen how the Federal Constitutional Court will decide. It is advisable for the taxpayers to file an appeal against tax assessments denying interest deduction due to these rules.