On November 1st 2010, the Finance Court Cologne published its decision passed on September 8th, in which it held that the fiscal authority may not impose the stay of execution of a tax bill upon the taxpayer solely for the purpose of acquiring an interest advantage for the state.

The decision is based on a case in which the plaintiff had to make additional payments of several million Euros after a tax audit. The plaintiff paid in due time, but appealed to the tax office on the matter of the changed tax bills. The tax office thereafter suspended the execution and refunded the additional tax paid without the plaintiff’s explicit request.
Responding to this unwanted refund, the plaintiff filed the case after failing in the appeal proceedings. She claimed that the stay of execution was unlawful, because it lead to the loss of interest income – she would be able to refinance the additional tax payments at an interest rate of around 2-4.3%, whereas a failure in the Finance Court proceedings when ordered stay of execution would lead to her paying the statutory interest rate of 6%.

German tax law does not provide an automatic stay of execution in the case of an appeal on a tax bill. Hence, if the taxpayer wants to make sure that no claims will become due, even though she appealed the initial tax bill, she has to file a petition for stay of execution. This petition will only be granted if there are compelling doubts in regards to the legitimacy of the appealed administrative decision or if the execution would lead to inequitable hardship for the petitioner which is not offset by overwhelming public interest, as laid out in § 361 (2) 2 Fiscal Code (Abgabenordnung, AO). Aside from this possibility, a stay of execution is also possible as an administrative decision by the fiscal authority (§ 361 (2) AO).

If during the appeal process, the execution of the tax statement is held and the appeal fails it will lead to the addition of a 6% yearly interest on the suspended taxes (§ 237 Abs.1 AO). If, however, the execution is not held, the taxpayer did pay the tax as ordered and the appeal is successful, the state has to refund the taxes with the same 6% markup (§ 233a Abs. 1 und 2 AO).

The court further assesses: Any forced stay of execution is in and of itself a mistake in the exercise of discretion. The stay of execution is a means for preliminary legal protection – there is thus no plausible reason to include the financial interest of the state in the discretionary process.
This forced stay of execution also violates the general rule of equality as laid out in the German constitution as any stay of execution against the will of the taxpayer is only used in a diminishing minority of cases and apparently only in cases with considerable amounts of dispute.

The reason for this is that in low interest periods, in which the capital market interest rates are well below the statutorily demanded 6%, it can be significantly more favourable for the taxpayer to forfeit a stay of execution and temporarily refinance the disputed amount of tax on the capital market. With this background in mind, the financial administration has begun forcing stays of execution on the taxpayer in lucrative cases to save the state from having to refund interests considerably higher than the capital market interest rates.

The senate has authorized appeals to the Federal Fiscal Court in Munich.