Federal Fiscal Court ruling: constitutionality of the provision concerning 5.5% interest in the Valuation Act

The effect of interest rates on taxation   

Effects of the interest rate on tax law can be found in many areas. Business valuation using the “simplified income approach” of sections 199 and following of the Valuation Act is one example where “discounting” is performed using a capitalisation factor (section 203(1)). This is multiplied by the annual income that can be sustainably generated in the future (sections 201 and 202, 200(1)). After the capitalisation factor had initially fluctuated in line with the overall real interest rate, it was subsequently set at a “fixed” rate of 13.75 for valuation dates after 31 December 2015 (Bavarian State Tax Office Circular of 8 Jun 2017). 

Discounting is also relevant in the context of tax accounting rules. The tax accounting treatment of non-interest-bearing liabilities (section 6(1) no. 3 of the Income Tax Act [Einkommensteuergesetz–EStG]) was initially based on an interest rate of 5.5%, before discounting was completely abolished by the Fourth Corona Tax Relief Act of 19 Jun 2022 (for application of this, see section 52(12) sentences 2 and 3 of the Income Tax Act). For tax balance sheet purposes, therefore, only the discounting of provisions remained, which is still to be calculated at 5.5% (first sentence of section 6(1) no. 3a (e)). 

Furthermore, on the asset side of the tax balance sheet, the Federal Fiscal Court even rejects the very principle of discounting non-interest-bearing receivables (Federal Fiscal Court judgement of 24 Oct 2012, file ref. I R 43/11, Federal Tax Gazette [Bundessteuerblatt–BStBl] II 2013, p. 162). It does not consider that the value resulting from the non-interest-bearing nature of a receivable held as a fixed asset constitutes a likely permanent impairment and therefore does not justify a partial write-down (section 6(1) no. 2 third sentence of the Income Tax Act; Federal Ministry of Finance Circular [Bundesministerium der Finanzen-BMF] of 2 Sep 2016, Federal Tax Gazette 2016, p. 995, para.15).

The effect of the interest rate is particularly evident in the case of “ancillary tax payments” (section 3(4) of the Fiscal Code [Abgabenordnung–AO]). These have recently been a focus for the courts since the macroeconomic effect of the period of low interest rates on the amount of such payments was to be taken into account. The provision regarding full interest on additional tax assessments and refunds under section 233a was deemed unconstitutional starting from 2014 with respect to the amount of interest (section 238(1); Federal Constitutional Court [Bundesverfassungsgericht–BVerfG] judgement of 8 Jul 2021, file ref. 1 BvR 2237/14, 1 BvR 2422/17). However, the obligation to enact a constitutional new provision was only declared to apply to periods beginning from 1 January 2019 and implemented in this respect by subsection 1a of section 238 of the Fiscal Code. On the other hand, the issue of “penalty interest” of 6% per fiscal year for failure to transfer reserves under section 6b of the Income Tax Act is structurally different – the Federal Fiscal Court considers this off-balance-sheet profit surcharge (section 6b(7)) to be “something else” in relation to interest on back payments (Federal Fiscal Court judgement of 20 Mar 2025, file ref. VI R 20/23).

The importance of the interest rate in valuation law

In valuation law, the general interest rate must in principle also be taken into account. However, this often involves valuations over longer periods than those under section 238(1) of the Fiscal Code, for example. The Federal Fiscal Court had to rule on the valuation of a lifetime annuity of 1,000 EUR per month, which had been agreed in exchange for the transfer of a property from the claimant’s uncle to the claimant (file ref. II R 35/23). Under the notarised agreement, the annuity was discounted at an interest rate of 0.5% per year.

The tax office, however, multiplied the annual value of EUR 12,000 by the multiplier to be applied under section 14(1) sentence 2 of the Valuation Act, which is based on a statutory interest rate of 5.5% and a mid-term payment method (section 14(1) sentence 3). Since the donor had reached the age of 78, this multiplier was set at 7.242. Consequently, the resulting value was lower than that obtained by calculating the present value using an interest rate of 0.5%, so the deduction in determining the recipient’s enrichment (section 10(1) of the Inheritance Tax Act [Erbschaftsteuergesetz–ErbStG]) was correspondingly lower and the gift tax higher.  

However, the Federal Fiscal Court did not consider the valuation under section 14(1) of the Valuation Act, based on the “fixed” interest rate of 5.5%, to be problematic. It particularly considered that there was no violation of the general principle of equality (Art. 3(1) of the German Basic Law [Grundgesetz–GG]). In contrast to the “full interest” approach taken in section 233a of the Fiscal Code, the valuation under section 14(1) of the Valuation Act must take into account the usual fluctuations in interest rates on the capital market in order to prevent the interest rate fluctuations inherent in the capital market from having an unreasonable impact on the valuation of a principal claim spanning longer periods of time. Charging interest under section 233a of the Fiscal Code, on the other hand, is intended as compensation for the use of capital.

Further issues relating to consideration of the interest rate in tax law

The amount of ancillary tax payments (section 3(4) of the Fiscal Code) has not, however, been called into question as a whole by the Federal Constitutional Court’s decision regarding section 233a and section 238(1) (judgement of 8 Jul 2021, file ref. 1 BvR 2237/14, 1 BvR 2422/17). The interest charged on deferrals, evaded taxes, refunds based on court decisions, and for suspension of enforcement (sections 234–237) remains unchanged at 6% (section 238(1) first sentence).

They are also not deductible for income tax purposes if the related tax itself is not deductible (section 12 no. 3 2nd half-sentence of the Income Tax Act; section 10 no. 2 2nd half-sentence of the Corporate Income Tax Act; section 4(5b) of the Income Tax Act). Conversely, refund interest is to be treated as taxable income from capital assets (section 20(1) no. 7 third sentence of the Income Tax Act), meaning that the “net interest” differs for debit and credit interest. According to Federal Fiscal Court case law, this also applies to litigation interest under section 236 of the Fiscal Code (judgement of 17 May 2021, file ref. VIII B 88/20) as well as for interest on a trade tax refund (judgement of 26 Sep 2025, file ref. IV R 16/23).

In addition, the late payment penalty (section 240 of the Fiscal Code) introduces a further ancillary tax payment (section 3(4) no. 5), which is only levied after the due date has passed (section 220) without requiring an assessment, since fulfilment of the statutory criteria is sufficient (section 218(1) first sentence second clause). For each month of default, a late payment penalty of 1% of the rounded amount of tax in arrears is payable (section 240(1) first sentence). The Federal Fiscal Court has no constitutional objections to this provision either, despite a structurally low interest rate (judgement of 23 Aug 2022, file ref. VII R 21/21, Federal Tax Gazette II 2023, p. 304; judgement of 23 Aug 2023, file ref. X R 30/21, Federal Tax Gazette II 2024, p. 215).