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April 25, 2014
German Court Questions Constitutionality of Interest Barrier Rule
by Pia Dorfmueller and Hardy Fischer

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In a decision in an interim measures proceeding1 published on April 16, the first chamber of the German Federal Fiscal Court expressed serious doubts about the constitutionality of Germany's interest barrier rule.
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.


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