Interest on German Tax Refunds – Settling with the Tax Office Can Be an Investment

Interest is generally associated with poor or at least negative connotations. Most often we associate it with banks and various loans, e.g., a loan for a house, an apartment, or a car. But what if we told you that you don’t always have to be afraid of them? You should know that as a German taxpayer, you can benefit in many ways.

How is that possible? It happens that submitting your tax return in Germany to the authorities not only proves to be a necessity but also a good investment, as you will see later in this article. Today it is about the interest on tax refunds, i.e., who is entitled to it and in what amount. We will also discuss the Federal Constitutional Court’s decision on the use of interest – please read on.

Interest on German tax refunds – Not to be confused with a penalty by the authorities

The most important point first: the interest on tax refunds in Germany, which we are writing about today, should not be confused with penalty interest. Penalty interest is also part of German tax law and affects people who submit their tax returns late to the tax office. You can find out more in the article “What happens if you submit your German tax return late?”

Interest on tax refunds in Germany – Up to 1.8% from the tax office

Now that you know that the interest on your tax refund in Germany does not necessarily mean you have to pay more, we can slowly move on to the actual part of the article. You should know that the German tax office can pay you a bonus in the form of this interest in addition to the tax refund. This is, of course, not the norm – otherwise everyone would be happy to settle their taxes every year. So when can you expect a bonus?

If you wait more than 15 months from the end of the calendar year in which you submitted your tax return, you must expect interest on taxes. These amount to 0.15% for each full month of delay, which can total an impressive 1.8% over the course of a year. The change in the interest rate was implemented by the Second Act Amending the Tax Code and the Introductory Act to the Tax Code of July 12, 2022 (BGBl. I p. 1142). The new regulation applies to interest periods from January 1, 2019, and is to be applied retroactively to all still open cases.

How can one benefit from interest payments in Germany? Not everyone can expect interest from the authorities with a tax refund:

If you follow our blog, you surely know that not everyone in Germany has to submit a tax return, in other words – they don’t have to settle their taxes. However, if this is new to you, read our previous post “Who has to submit a tax return in Germany”?

We are pointing out that not everyone is obliged to submit a tax return to the tax office in Germany for a reason. Those who are not obliged can expect interest – provided, of course, that they submit the return voluntarily and that 15 months have passed since the end of the calendar year.

Are you hoping for interest on your tax return in Germany? Do not submit your tax return on time

In Germany, there are certain deadlines for submitting tax returns. If you meet them year after year, you must know that you have no chance of receiving interest. Of course – you are doing everything right if you follow the rules. However, remember that if you submit your tax return on time, it is usually processed quickly, and you should have the money in your account after two to three months.

Submitting the tax return in Germany and interest – the later, the better

If you want to expect interest from the tax office in Germany, you should wait with the timely submission of the tax return. You should know that from the end of the tax year, you have four years to submit your tax return. An example: You can submit your documents for the year 2021 by December 31, 2025, at the latest. In practice, this means: The later you decide to settle your taxes with the German tax office, the higher your chances are that you will be granted interest.

Tax interest in Germany – how much money is involved?

It is best to speak of money with a good example. So let’s assume you voluntarily submit your tax return by the last possible date, i.e., by December 31, 2025. Suppose the tax office sends you the tax return in early March 2023. Assume that the tax refund from Germany amounts to €2,500. There are also the interest you are entitled to. After deducting the first 15 months, which are interest-free, 35 months remain, which must be interest-bearing.

So: €2,500 x 35 x 0.5% = €437.5 in interest. In this case, the tax refund increases by more than €400, so we have a total payment of almost €3,000.

Tax interest income in Germany – Are they taxable?

You must know that interest income paid by the German tax office is taxable. This is directly derived from § 20 of the Income Tax Act (EStG). This, in turn, means that you must include the interest in the income tax in the tax return. For this purpose, you should enter the value of the interest income in the KAP annex. Note that in this case, the year of payment to the tax office in Germany is decisive.

Do you have to claim the interest?

A common question from people hoping for interest is whether they need to apply for it in any way. We answer briefly: No, in fact, the German tax office calculates the amount itself and also transfers it to your account. So you can be sure that if you are entitled to a bonus, you will definitely receive it – but you need to be patient.

High interest on German tax refunds – Federal Constitutional Court says STOP

Just a few weeks ago, there was an important change in interest on tax refunds in Germany. The Federal Constitutional Court decided that high interest on tax debts is unconstitutional. The judges believe that interest rates at this level should not be permissible because the current system exposes the state budget to too much uncertainty.

What does this mean for taxpayers? The Constitutional Court orders that those who pay interest on tax refunds (refund interest) from 2019 onward – and collect them analogously – are affected by the changes. However, the prerequisite is that the tax assessment is not legally binding. Due to the unclear legal situation by which the tax administration has provisionally set the interest for each registration from May 2019, this is very likely for many people. It is currently not known how many taxpayers will be affected.

However, it is likely that every taxpayer in Germany who has paid too much tax can expect to get some of the money back. The opposite applies to those who have received tax interest – these differences will probably have to be repaid. How high these amounts will be individually, we cannot say at this present time; it depends on the future interest development.

Do you need help with your tax return? Do you have questions about tax interest? Are you looking for a tool with which you can fill out your tax return in a few minutes and send it to the tax office? Then use Taxando, a modern application for submitting the tax return in Germany. If you opt for the PREMIUM package, you can count on the support of an experienced tax advisor as well as a secure, swift, and above all safe tax refund from Germany.