Full interest does not contravene EU law

Facts

In 2007, the claimant had claimed VAT amounts from other EU Member States as input VAT in his German VAT return. After the tax office had uncovered this error, a VAT assessment was issued with a substantial additional claim. The tax office combined the tax assessment with the imposition of interest on arrears pursuant to Section 233a of the German Fiscal Code (AO) – the assessment was provisional with regard to the constitutionality of the interest rate.

The claimant unsuccessfully lodged an objection against the interest assessment. During the pending legal proceedings, the tax office waived part of the interest on grounds of equity. Beyond that, the claimant was unsuccessful and lodged an appeal. 

He argued, among other things, that the suppliers from whose invoices he had claimed input VAT deduction had paid the VAT shown in their respective Member States, so that no damage had been caused when viewed from a cross-border perspective. The interest effectively acts as a penalty surcharge; this is disproportionate and infringes the plaintiff’s fundamental rights under the Charter of Fundamental Rights.

The key aspects of the Federal Fiscal Court’s decision

The Senate dismissed the appeal and confirmed the lawfulness of the interest assessment. It was not an ‘implementation of EU law’ within the meaning of Article 51 (1), first sentence, of the Charter of Fundamental Rights of the European Union and was therefore not subject to the principle of proportionality under this Charter. Nor did it otherwise fall within the scope of EU law. The interest regulation is not of a punitive nature; rather, it serves to ensure uniformity of taxation by offsetting the differences arising from tax assessments made at different times. A cross-state assessment in connection with the principle of neutrality is not required.

Interest on arrears of VAT does not serve to implement EU law simply because it has the character of VAT. This is not the case because, inter alia, interest is not set in proportion to the price of the supplies provided.

Even if Section 233a of the German Fiscal Code (AO) were a provision implementing EU law, such that a proportionality test would have to be carried out, there would be no corresponding infringement. The statutory classification of interest is permissible; any potential hardship must be taken into account in the equity proceedings.

It is not necessary to request a preliminary ruling on this question from the General Court of the EU, as the senate has no doubt that Section 233a of the German Fiscal Code (AO) does not serve to implement EU law.

Analysis

This judgment confirms that full interest is a purely national compensation mechanism that does not fall under European law. The argument that no cross-border assessment is required to determine whether too little VAT was paid is convincing. Otherwise, the tax sovereignty of the individual federal states would be infringed. Consequently, businesses will continue to be unable to succeed with fundamental objections to the setting of interest rates in the future. One possibility is a remission on grounds of equity. However, such applications must be carefully substantiated and are likely to succeed only in specific individual cases.

Author: Nadia Schulte