BFH: Interest barrier rules not line with the German Constitution

On 10 February 2016 the German Federal Fiscal Court (BFH) has published a decision of 14 October 2015 (I R 20/15) in which the 1st senate of the BFH takes the position that the German interest barrier rules violate the general principal of equality (Art. 3 para. 3 German Constitution) and thus are not in line with the German Constitution. The court has referred the case to the German Federal Constitutional Court.

Background: German interest barrier rules

Pursuant to the German interest barrier rules a taxpayer can deduct interest expenses in the amount of interest income of a fiscal year. Any exceeding interest expense (net interest expense) is only deductible

  • if it is below € 3m,
  • if the taxpayer is not (fully) part of a group of companies,
  • if the taxpayer can evidence that its equity ratio does not fall short of more than 2% of the equity ratio of the group of companies to which the taxpayer belongs, or
  • in the amount of 30% of the taxable EBITDA of a fiscal year (including taxable EBITDA carried forward from previous fiscal years, if any).

Any interest not deducted can be carried forward (interest carried forward). 


The BFH takes the position that the German interest barrier rules violate the legal principal of a coherent income tax system based on the financial capacity of the taxpayer which derives from Art. 3 para. 1 German Constitution. German company taxation is generally based on the taxation of the net income (i.e., the difference between income items and business expense items).

The court holds that the legislator has violated this basic principal by introducing the German interest barrier rules resulting in business related interest expenses being non-deductible and, therefore, no longer taxing the net income.

Furthermore, the BFH rejects several justifications for the violation. Special reference should be made that the court rejects a justification on the grounds of combating tax abuse because the rules are not limited to cross-border situations but apply to purely domestic cases also. 


The BFH’s decision is of particular relevance since the OECD in Action 4 of its BEPS (Base Erosion and Profit Shifting) initiative proposes to introduce interest barrier rules more or less mirroring the German interest barrier rules.

Further, on 28 January 2016 the EU Commission has published a proposal for a Council Directive (2016/0011) which inter alia includes the introduction of a European harmonised interest barrier with the “aim to tackle cross-border tax avoidance practices” and to provide a common framework for implementing the outputs of BEPS into Member States’ national laws in a coordinated manner. 

Despite the draft Council Directive aiming at cross-border tax avoidance practices, the proposal seems not to be limited to cross-border cases.

Should the proposal of the Commission be adopted, the Member States would be obligated to incorporate the interest barrier in their national legislation.

Short term relevance for the taxpayer

Until the decision of the German Federal Constitutional Court taxpayers should keep all tax assessments for which the interest barrier is of relevance open for-reassessment. To the extent that the tax authorities, in light of the case now pending with the German Federal Constitutional Court, do not declare assessments preliminary pursuant to § 165 German General Tax Code (Abgabenordnung), it should be considered to timely file an appeal.

In addition, the European development remains to be seen. Especially, the question arises whether the BFH’s referral has an impact on the Commission’s Council Directive proposal.

Dr Frank Tschesche, LL.M., Nicolas Wolski, LL.M., Lars-Olaf Leskovar, LL.M. (all tax law, Frankfurt)

Key Contact

Dr Gökçe Uzar Schüller
T +49 69 707970-112