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BFH rules on tax treatment of interest income resulting from tax refunds
In Germany, both late tax payments and tax refunds generally bear interest at 6% per annum, with the interest-bearing period beginning 15 months after the end of the relevant tax year. While interest expense incurred as a result of a late payment of corporate income tax is nondeductible under the Corporate Income Tax Act, interest income derived from a refund of corporate income tax results in taxable business income.
In a decision published in 2009 (case reference: I R 39/09), the Federal Tax Court (BFH) confirmed the above treatment for corporate income tax purposes. The case involved a German tax audit in a GmbH that resulted in additional corporate income tax payments for the years 2002-2004. The taxes assessed included an interest charge for late payment. The BFH based its decision partially on the fact that in the years at issue, there was no difference in the treatment of late payment interest for individual income taxpayers and corporate income taxpayers.
However, in a decision published in September 2010, the BFH has changed its view on the tax treatment of penalty interest for individual income tax purposes (case reference: VIII R 33/07).
The court held that:
- Interest charged on the late payment of individual income tax is nondeductible under the Individual Income Tax Act (confirmation of the previous treatment); but
- Interest received as a result of a refund of individual income tax will not be taxable where penalty interest payments would be treated as nondeductible (change of previous treatment).
Thus, interest on late tax payments and tax refunds is no longer treated similarly for corporate income tax and individual income tax purposes. The BFH may in the future have to review the different treatment of interest for corporate income tax purposes refunds to determine whether interest income on tax refunds should be tax neutral. Corporate taxpayers should carefully monitor developments on this issue.
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