Reimbursement interest on trade tax is taxable

Treatment of reimbursement interest in income taxes

The taxation of “ancillary tax payments” (Sect. 3(4) General Fiscal Code) on business taxes has always been a bone of contention. The range of ancillary tax payments is wide: It includes, for example, surprising items such as fees for rulings (Sect. 3(4) no. 7 General Fiscal Code; Sect. 89 General Fiscal Code), which are considered non-deductible insofar as they relate to taxes that are themselves non-deductible (Sect. 12 no. 3 Income Tax Act; Sect. 10 no. 2 Corporate Income Tax Act; Sect. 4(5b) Income Tax Act; Judgement of the German Federal Fiscal Court dated December 8, 2021, file number I R 24/19, Federal Tax Gazette II 2024, p. 550).

Conversely, however, this issue can also work out favorably for the taxpayer: According to Sect. 233a General Fiscal Code, the taxpayer is entitled to reimbursement interest after the expiry of a grace period (Sect. 233a(2) General Fiscal Code) for the taxes specified in Sect. 233a(1) sent. 1 General Fiscal Code, but this interest must be treated as income from capital assets according to Sect. 20(1) no. 7 sent. 3 Income Tax Act. The “imbalance” with the non-deductibility of interest on arrears paid by the taxpayer has been addressed by the Federal Fiscal Court (Judgement dated April 15, 2015, file number VIII R 30/13) and the Federal Constitutional Court (Judgement dated July 12, 2023, file number 2 BvR 482/14), both of which were not convinced of the unconstitutionality of this state of affairs.

Taxes that are subject to reimbursement interest include income tax and corporation tax, but also trade tax (Sect. 233a(1) sent. 1 General Fiscal Code). Here, too, the question arises as to whether reimbursement interest must be treated as business income, even though corresponding interest on arrears is not deductible as ancillary tax payments under Sect. 4(5b) Income Tax Act. Ultimately, in the case of a corporation as a commercial enterprise (Sect. 2(2) sent. 1 Trade Tax Act), for example, the refund interest of 1.8 percent is subject to a tax burden of approx. 30 percent, resulting in a credit interest rate of only approx. 1.2 percent. 

The lower Fiscal Court of Düsseldorf confirmed this “asymmetry” in a ruling from 2023 (Judgement of the Fiscal Court of Düsseldorf dated May 4, 2023, file number 9 K 1987/21). The prohibition on deducting operating expenses under Sect. 4(5b) of the Income Tax Act for trade tax does not result in symmetrical taxation of interest on arrears and reimbursement interest, which could justify an off-balance sheet reduction of profits by the amount of reimbursement interest on trade tax.

Federal Fiscal Court confirms taxability of reimbursement interest on trade tax

In its review of the judgement of the lower tax court of Düsseldorf, the Federal Fiscal Court confirmed this approach (Judgement dated September 26, 2025, file number IV R 16/23). According to Sect. 4(5b) of the Income Tax Act), trade tax itself is not a business expense. The Federal Fiscal Court interprets this provision of the law to mean that although it is a business expense, its effect must be corrected off-balance sheet. Conversely, a trade tax refund by the tax office is not treated as operating income, so that there is symmetry in the case of trade tax itself (margin no. 26).

The situation is different, however, in the case of the associated full interest, where credit interest and debit interest have different fates under Sect. 233a of the General Fiscal Code. Essentially, the Federal Fiscal Court assumes (margin no. 34) that “unlike in the relationship between paid and refunded trade tax, interest on refunded trade tax is not the opposite of interest on additional payments of trade tax.” “Refund interest is not based on the fact that a previous payment (to the tax authorities) in the form of interest on arrears is returned in the opposite direction; rather, refund interest provides compensation for the fact that the taxpayer was denied the opportunity to use capital due to excessive tax payments.”

The Federal Fiscal Court also does not consider the general principle of equality (Art. 3(1) of the German constitution) to have been violated (margin no. 39). In the absence of deductibility of interest on arrears as ancillary payments to trade tax pursuant to Sect. 4(5b) Income Tax Act and the taxability of refund interest for trade tax, the facts of the scenarios are not comparable. There is also no general principle that income is not subject to taxation if the expenses resulting from the relevant circumstances are not deductible.

However, the Federal Fiscal Court (margin no. 44) left open the question of whether the tax authorities are legally required to tax refund interest only to the extent that it exceeds the amount of interest on arrears incurred (in the same year).

Trials and tribulations regarding reimbursement interest

The issue of ancillary tax payments (Sect. 3(4) of the General Fiscal Code) and the asymmetry between credit and debit interest rates – now confirmed by the Federal Fiscal Court – gives rise to further special cases that may lead to more favorable outcomes. In particular, the question arises as to how refund interest within the meaning of Sect. 233a(1) General Fiscal Code is treated in favor of the taxpayer in the event of a repayment to the tax office. In this regard, the Federal Fiscal Court has ruled that the repayment may lead to negative income from capital assets within the meaning of Sect. 20(1) no. 7 sent. 3 Income Tax Act (Judgement dated August 1, 2023, file number VIII R 8/21). The otherwise existing prohibition on deducting income-related expenses (Sect. 2(2) sent. 2 Income Tax Act; Sect. 20(9) Income Tax Act) for income from capital assets therefore has no influence here.

The determination of interest is also challenging from a procedural point of view: Anyone who believes that interest on proceedings is not taxable under Sect. 236 General Fiscal Code, whereas interest on refunds is already taxable under Sect. 233a General Fiscal Code by statutory order (Sect. 20(1) no. 7 sent. 3 Income Tax Act), must pay close attention when filing a lawsuit: The assessment notice on the interest is not binding (Sect. 171(10) sent. 1 General Fiscal Code) for the assessment notice on income tax; this would have required a statutory provision. Rather, the income tax assessment autonomously decides whether interest received is interest paid for the period of litigation (“Prozesszinsen”) or refund interest (Judgement dated March 12, 2024, file number VIII R 10/20). Conversely, however, the income tax assessment is binding for the interest assessment (Judgement dated December 13, 2022, file number VIII R 16/19, margin no. 20).