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Interest on Your Tax Returns: Paybacks & Profits

Your tax return may bring you more than just a refund. Tax returns that are under review and not yet finalised can lead to charges or 'profits' through interest. A new ruling has changed the interest situation.
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You may receive a high interest from the tax office

The tax office pays you an additional interest on top of your tax refund – but only after an interest-free period has elapsed. The calculation of interest begins 15 months after the end of the calendar year of filing the return, after the so-called grace period. Thus, when you earn a late tax refund, you receive 0.5% interest per month (see: §233a and §238 AO).

Compared to conventional investments, this is an extremely high figure.

We show you how the tax interest affects refunds and additional payments.

Current developments:
  • With the judgement 1 BvR 2237/14, 1 BvR 2422/17 of 08 July 2021, the Federal Constitutional Court changed the interest situation for tax refunds or back payments. According to the ruling, the previous interest rate was far from the reality on the interest market and has been declared unconstitutional retroactively since 2014.
  • However, the tax offices only have to revise tax assessments from 2019. Although interest periods between 2014 and 2018 have been classified as ‘evidently unrealistic’, they are still to be treated legally like assessments prior to 2014.
  • This means that in addition to the years before 2014, there may be high interest on tax refunds from 2014 to 2018.
  • Interest periods from 2019 onwards will now be considered and reviewed again. In the case of tax assessments that have not yet become final, it is possible that interest on arrears paid for the period from 2019 will be refunded. Alternatively, it is possible that any overpaid interest will have to be repaid to the tax office.
  • Legislators now have until the end of July 2022 to come up with a new rule and reset the interest. It’s too early to predict how this will affect tax refunds/back payments.
  • Because of the situation regarding interest is yet to be resolved (the high interest rates have in part already been declared unconstitutional earlier), there are many provisional tax assessments and, thus, many likely cases of additional claims or payments by the tax office. If the tax office issues an assessment or certain parts thereof under a provisional notice (such as with regard to the amount of interest), there’s a way to adjust these assessments – after the legislator has clarified the facts. The notice does not become final in this respect.
  • However, there’s not much you can do at the the moment. The tax office will contact you if you have an open assessment for which interest accrues after the interest-free period has elapsed.

How to Benefit From High Interest Rates

If you always file your tax return on time, you hardly ever benefit from interest payments from the tax office. As a rule, you will receive your tax assessment after two or three months and, as mentioned above, the interest calculation only starts much later.

However, there are some ways to receive a very late tax assessment:

  • You have lodged an appeal with the tax office against your provisional tax assessment.
  • After an unsuccessful appeal, you take legal action against the decision of the tax office that items are not recognised or miscalculated.
  • You submit your voluntary tax return very late.

In the past, it was possible to benefit from high interest, especially by filing a voluntary tax return. You have four years to file a voluntary tax return. Due to the new ruling of the Federal Constitutional Court, you can no longer influence this. Tax interest is still possible, but the amount of interest has yet to be determined by the legislature. Particularly high interest rates are currently possible only if your tax case satisfies at least one of the first two above-mentioned cases.

This means that it is no longer possible to realise excessively high tax gains:
  • You submit your voluntary tax return for 2017 on the last possible date (30 December 2021). The tax assessment notice will be sent to you at the beginning of March 2022 and will show a tax refund of 1,500 euros.

 

  • In addition to this amount, you are also entitled to interest. However, the first 15 months of the waiting period are interest-free. As a result, the interest run/interest period only begins in April 2019. Since the 6% interest per year no longer applies to periods from 2019 onwards, the active late submission of the voluntary tax return means that no interest income is possible as before.

Before the tax interest ruling, the following was possible:
After the first 15 interest-free months, 35 interest-bearing months remain, from April 2019 to February 2022, with the following effect:

You would have received an additional €262.50 in interest on top of the refund, adding to a total of €1,762.50.

Do I have to claim the interest individually?

No, if you are entitled to refund interest, you don’t have to take additional action. The tax office calculates the amount of interest independently and transfers it to your account together with the tax refund.

Is the interest I earn on my taxes taxable?

You must pay tax on the interest income that the tax office pays you as income from capital assets (§20 EStG). This is because you have not yet paid any capital gains tax (also called final withholding tax) on this interest.

For this purpose, you must enter the interest income in the KAP annexe. The tax office decides the year of payment.

Are there any disadvantages of getting an interest on the tax return?

The longer an appeal or legal proceedings take, the higher the interest bonus. However, this favours your finances only if you get a tax refund. Interest is charged similarly when you have to pay tax arrears. Here, too, the interest rate for interest periods up to the end of 2018 is rather sizeable. For subsequent periods, the interest rates are not yet finalised.

Unlike interest on refunds, interest on arrears has no tax significance. You cannot deduct it from your tax return.

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Pooja Ghosh
by Pooja Ghosh
published on: 18.08.2022
updated on: 08.11.2022

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