Interest on reimbursed loan fees is taxable

An end to credit fees – but reimbursement interest is taxable!

Interest on refunded loan processing fees is taxable investment income and thus subject to the flat-rate final withholding tax. The federal ministry of finance (BMF) expressly points out this rule in a letter (BMF letter, file number: IV C 1-S 2210/15/10001). The problem: many banks have refunded processing fees to their customers in the past two years, but have omitted to deduct the lump-sum tax. For this reason, the tax offices will focus on examining interest on loan processing fees in the next few years. Read in this article what you must do now to avoid being considered a tax evader and getting in trouble with your tax office.

Background: BGH declared processing fees for loan agreements to be unlawful

Background: in 2014, the federal court of justice (BGH) ruled in four rulings that processing fees for loan agreements are illegal and must be reimbursed to customers. This supreme court decision primarily concerns installment and car loans as well as real estate loans, but not building savings contracts. Borrowers are entitled to repayment of fees.

There is also a claim to interest as compensation for use (BGH rulings of 13.5.2014, file no: XI ZR 405/12 and XI ZR 170/13; BGH rulings dated 28.10.2014, file no: XI ZR 348/13 and XI ZR 17/14). The interest rate is five percentage points above the respective prime rate since the payment and is to be applied to the day. No compound interest is charged, as this effect is already taken into account in the flat interest rate.

The reasoning of the federal judges: the processing of a loan is not an additional service for the customer. It is rather in the bank's own interest to check the customer's ability to pay and to prepare the conclusion of the contract. For this it may not collect extra. For the expense always associated with the conclusion and processing of a loan agreement, the credit institutions were entitled to interest alone. Read more ways to save on a (new) loan here.

In november 2016, the BGH judges clarified in another ruling that loan fees for building society loans are also illegal (BFH ruling of 8.11.2016, file no: XI ZR 552/15). Also invalid are "one-time individual contributions independent of the term". On the other hand, fees paid for kfw loans can usually not be reclaimed.

Here's how to pay taxes on interest on loan fees

You must pay tax on interest that your banks refunded to you for illegally collected loan fees. Interest is subject to the flat-rate withholding tax on investment income, currently 25 percent. Also possible is a so-called individual taxation via the income tax return and with your personal tax rate.

You pay tax on the interest in the year in which you received it (so-called inflow principle). So there is no "tax reversal" of the individual years for which you have received the interest. If the bank transferred the interest to you in 2016 without deducting tax, you must declare it on your 2016 income tax return and pay tax on it subsequently.

Since the refunded interest is completely normal capital income, you are entitled to the savers' flat-rate amount. The bank takes your lump-sum savings amount into account if you have given it an exemption order. If not, declare the interest received in your income tax return and the tax office will automatically apply the saver's flat rate amount. The same applies if you are a low-income earner and have submitted a non-assessment certificate (NV certificate) to your bank.

Examples: this is how much money is at stake when it comes to taxes on refund interest

The following two example calculations show how the tax liability affects the refunded interest. The more capital gains you have, the more the tax office collects from the interest.

Example: you are unmarried and in 2012 you took out a real estate loan of 150.000 euros received. For this, the bank charged one-time loan fees of 4 percent of the loan amount. After the 2014 BGH rulings, you demanded that the bank repay you the loan fees together with interest. The bank transferred both amounts on 1. December 2016. Therefore, the interest received is taxable in 2016.

In the first calculation, you have no other investment income in 2016:

1. Example calculation without further capital income

item amount in euros
loan amount 150.000,00
reimbursed bank loan fees, one-time 4 percent 6.000,00
interest thereon, 5 percentage points above prime rate, to the day from 1.2.2012 to 30.11.2016 1.302,95
savers' lump sum for single persons – 801,00
taxable 501,95
withholding tax on this amount (25 percent plus 5.5 percent solidarity surcharge, excluding church tax) 132,39

Result 1: if you do not receive any other income from investments, your saver's allowance mitigates about 60 percent of the tax liability on refund interest. Nevertheless, the amount of the remaining tax liability shows why tax authorities have placed their audit focus on the issue. Incidentally, in the case of a married couple filing jointly, the double saver's allowance would have reduced the tax liability to zero.

The second calculation with further capital income illustrates that the tax office does not differentiate between the sources of capital income for tax purposes:

2. Example calculation with further capital income

item amount in euros
loan amount 150.000,00
reimbursed bank loan fees, one-time 4 percent 6.000,00
interest on this, 5 percentage points above the prime rate, payable on a daily basis from 1.2.2012 to 30.11.2016 1.302,95
other capital income: dividends, interest and gains from the sale of shares + 3.500,00
savers' lump sum for single persons – 801,00
taxable 4.001,95
final withholding tax on it (25 percent plus 5.5 percent solidarity surcharge on it, excluding church tax) 1.055,51
amount of tax attributable to the full "additional received" refund interest (1.302,95 euro * 0,25 * 1,055) 343,65

Result 2: the modified example shows in the last line how much tax is due on the refund interest in the worst case, if you consider it on its own. The lump-sum saver's allowance has already been exhausted due to the high level of investment income. Coming now 1.If you add 302.95 euros in reimbursement interest, your tax burden increases by 343.65 euros.

This finding can be used for further variations. If we in example 2 only of a 15.000-euro loan, then the additional tax burden also drops to a tenth: 34.37 euros.

What you need to do now

Since the BMF letter of 27.05.2015 (see above) only pay out the interest in full if they have an exemption order or a non-assessment certificate from the customer. This ensures that interest is automatically taxed for current refunds.

If you will receive the refund interest in the current year, send your bank an exemption order or a non-assessment certificate in time beforehand.

Special case before may 2015

If the bank has already refunded you the loan fees plus interest before may 2015, it probably did not withhold any final withholding tax. Check this. Also check whether your taxable refund interest together with other investment income from the same year exceeds your saver's allowance as a single person(s) or jointly assessed married couple.

If you have not paid tax on the interest, consult with your bank on how to proceed further. There are two options:

  • A) your bank corrects the statement and requires you to pay the final withholding tax including solidarity surcharge and, if applicable, church tax retroactively.
  • B) you pay tax on the interest received yourself by entering the amount in your tax return in the KAP annex, line 7.

If you do none of the above, you are guilty of tax evasion.