Deferment

The agreement between a creditor and a debtor to postpone a required due date is called a deferment. Otherwise, the due date of the claim arises from the agreement or from the law.

Normally a deferment has the following effects: the claim cannot be enforced by the creditor, but it nevertheless remains to be fulfilled. A deferment does not lead to default and, due to the lack of maturity, there is also no statute of limitations. Depending on the circumstances, the deferment agreement can be interpreted as an acknowledgment of a debt by the debtor.

Legal foundations for deferment

A deferment can already be agreed upon when the contract is concluded or can be made afterwards by amending the contract, pursuant to § 311 Abs. 1 BGB. In general, no specific form is prescribed for the deferment. A verbal agreement between the debtor and the creditor is basically sufficient. However, written form is advisable for evidentiary reasons.

If the underlying contract itself requires a specific form, such as a land purchase agreement, the requirement for a particular form also applies to a deferment agreement. For clarity, the end of the deferment period should be determined by a deadline specifying the termination of the deferment.

A deferment may be appropriate, for example, if the debtor is temporarily in payment difficulties and can credibly demonstrate that repayment of the debt will be possible at a later date. Colloquially, deferment is also used to describe a waiver of the immediate collection of a debt that is due because of installment payments. The deferment may be limited in time or linked to a resolutive condition pursuant to § 158 BGB, so that, for example, the claim becomes due before the end of the period if the debtor suddenly has sufficient financial resources.

Deferral of claims

This is the contract between the debtor and the creditor by which the due date is postponed. Suspension of limitation periods occurs during the deferment pursuant to § 205 BGB.

Deferral of claims arising from tax liability

A deferment is possible if, at the time the tax amounts are due for collection, it would constitute a significant hardship for the taxpayer and the claim is not jeopardized by a deferment. A deferment is normally granted only upon application and against the provision of security pursuant to § 222 sentences 1 and 2 AO. The tax authority must decide on this in the exercise of its duties. If a significant hardship exists, there is a legal entitlement to a deferment. Within the limits of § 102 FGO, the decision can be reviewed by the court.

Requirements

Both the taxpayer's personal and economic circumstances may be relevant — these include personal equitable grounds such as unemployment, illness or certain operational circumstances, as well as natural disasters and further circumstances that lie in the matter itself. These prerequisites must be substantiated (objective equitable grounds).

Objective equitable grounds

These exist whenever the amount claimed as well as another tax can be repaid within a short period and with high certainty, and this can be demonstrated by the taxpayer. In such cases, a so-called offset deferment (Verrechnungsstundung) can be granted.

Personal equitable grounds

These exist when the taxpayer is in need of a deferment or is deserving of deferment.

Need for deferment or significant hardship

This can only be assumed if the necessary funds are not available for timely payment without the taxpayer having caused this situation himself and if they cannot be obtained in a reasonable manner, for example by taking out a loan. In such cases deferment of installment payments is regularly excluded if the taxpayer should have anticipated them. The taxpayer must demonstrate the significant hardship by providing a currently prepared statement of his liquid funds as well as assets and outstanding obligations that are due in the short term, clearly and unequivocally, for each day of the due date.

Eligibility for deferment

This can usually only be assumed if the taxpayer did not bring about the inability to perform by his own fault or did not blatantly act against the fiscal interests of the public, for example by violating tax payment and reporting obligations, unequal satisfaction of creditors, or inappropriate use of funds.

Prohibition of deferment

Tax claims against the taxpayer cannot be deferred insofar as a third party (obligated remitter) has to pay or withhold them (prohibition of deferment of withholding taxes such as wage tax, construction withholding tax, capital gains tax pursuant to § 48 EStG; see § 222 sentence 3 AO). The deferment of a liability claim is also excluded against the obligated remitter (for example the employer in the case of § 42 EStG), insofar as he has collected tax amounts or tax withholding amounts (§ 222 sentence 4 AO).

Interest during deferment

Interest is charged for the period of the granted deferment of claims arising from tax liability if, depending on the individual case, a non-interest-bearing deferment has not been approved, pursuant to § 234 AO. Tax-related ancillary payments are not subject to interest.

Calculation principles

The interest amounts to 0.5 percent for each full month of the interest period. Partial months are disregarded. The amount to be charged with interest is rounded down to the nearest full €50. A de minimis threshold of ten euros applies pursuant to § 239 II AO. If, after the end of the deferment, the tax assessment is changed, revoked or corrected due to an obvious error, this has no effect on the deferment interest that has accrued up to that point.

Waiver of interest

The tax authority can waive the assessment of interest entirely or partially insofar as the collection of the interest would be unreasonable in the individual case. This can occur, for example, in the following cases:

in cases of disaster
in the event of prolonged unemployment
in the case of illness of the taxpayer
in the event of liquidity difficulties due to receivables in insolvency proceedings
in the case of reorganizations
in the context of a so-called offset deferment with regard to refund claims that become due in the short term to a taxpayer who has, up to that point, met his tax obligations punctually and did not want deferments.

When is a deferment appropriate?

A deferment is a temporary suspension of repayment of principal on a loan. A deferment always represents a deviation from the agreed loan conditions, which must be approved by the lender. In the deferment of a loan, the agreed loan installment does not disappear completely. Only the repayment (principal) payments can be suspended, not the interest payments. The borrower continues to pay the interest portion. Therefore only the installment is reduced.

This option is suitable when financial bottlenecks need to be bridged. However, this type of payment relief is not a permanent solution. The deferred loan will inevitably be extended in term unless the missed principal payments are made up. A deferment can be granted pursuant to § 59 Abs. 1 S. Nr. 1 BHO. The decision on a deferment application is discretionary; there is no legal right to a deferment. It is possible to apply for release from the repayment obligation for installments that are still due.