Newsflash Tax: Federal Fiscal Court doubts the constitutionality of the German interest barrier
On 14th October 2015, the German Federal Fiscal Court decided that the German thin-capitalization-rules violate the German constitution and suspended the proceedings. Now the German Federal Constitutional Court will decide whether or not the interest barrier is constitutional. With regard to this upcoming decision, taxpayers who are affected by the interest barrier should file an objection against their tax assessments. According to the Federal Fiscal Court, the interest barrier violates the objective net income principle. The German interest barrier limits the deductibility of interest expenses that exceed the interest income of the same fiscal year. Interest expenses that overweigh the amount of interest income are only deductible up to 30% of the EBITDA (earnings before interest, taxes, depreciation and amortization). Generally, interest expenses that can not be deducted in a given year can be carried forward to reduce the tax base in the following years. However, this opportunity might be excluded in case of a harmful share transfer. One of the main questions for the future is the impact of the Federal Constitutional Court’s decision on the BEPS (Base Erosion and Profit Shifting) - project of the OECD although the pending case has no cross-border element.