The interest barrier rule, in effect since 2008, generally limits the tax deductibility of interest expense -- regardless of whether a loan is granted by a bank or shareholders -- to 30 percent of a company's taxable earnings before interest, taxes, depreciation, and amortization, with only a few exceptions. In the underlying case, all the requirements for the application of the interest barrier rule had been met. The taxpayer filed an appeal against the corporate tax assessment notice in an interim measures proceeding. The decision in the main proceeding is still pending.
The court noted constitutional concerns about the interest barrier rule as a whole. The limitation of the interest deduction for tax purposes violates the objective net principle, which allows for the deduction of expenses effectively connected with a taxable activity. The court held that there is no justification for that violation, either in the form of a defense against abuse or for fiscal purposes. The court further stated that the legislature has had ample opportunity to word the interest barrier rule more accurately (and in accordance with the constitution).
The court affirmed the suspension of any enforcement action against the taxpayer, although the interest barrier rule resulted in a low tax burden in this specific case. All tax assessments currently affected by the interest barrier rule should be kept open. Current tax assessees could receive notices of provisional status from the tax authorities.
There are other cases involving the interest barrier rule before the court, and because of its ruling in this case, a referral to the Federal Constitutional Court is highly probable. It remains to be seen whether that court will declare the rule to be unconstitutional (and with retroactive effect), or will merely demand a new provision for the future.
Pia Dorfmueller and Hardy Fischer, P+P Pöllath + Partners, Frankfurt and Berlin
1 Case I B 85/13 of December 18, 2013.
END OF FOOTNOTE
About Tax Analysts
Tax Analysts is an influential provider of tax news and analysis for the global community. Over 150,000 tax professionals in law and accounting firms, corporations, and government agencies rely on Tax Analysts' federal, state, and international content daily. Key products include Tax Notes, Tax Notes Today, State Tax Notes, State Tax Today, Tax Notes International, and Worldwide Tax Daily. Founded in 1970 as a nonprofit organization, Tax Analysts has the industry's largest tax-dedicated correspondent staff, with more than 250 domestic and international correspondents. For more information, visit our home page.
For reprint permission or other information, contact email@example.com