Countdown for tax frauds in Germany

More than 30.000 tax frauds reports up to October 2014 – a new record.

Like we assumed and informed you before (see our article “tax fraud reports in Germany” from June 2014), tax fraud reports will be more expensive in the future, because up from the year 2015 there will be stricter laws in Germany.

People doing tax frauds in Germany get more and more scared. The amount of tax fraud reports rose up to a new record in 2014. The record result of the year 2013 (around 24.000 tax fraud reports) is long ago. The reason for such a run is pretty clear. Up from January 2015 the affected people will have to pay much more money to achieve a penalty free tax fraud report. In detail:

  • The limit for a penalty free report sinks from € 50.000 to € 25.000.
  • The penalty fee is 10 %.
  • Up from the amount of € 100.000 the penalty fee is 15 % and up from € 1.000.000 even 20 %.
  • Besides also the interests (6 % per year) has to be paid immediately.

 
Author: Claudia Keidies, Partner at Somann & Scheller, Hamburg


International advice for medium-sized businesses

On the 23rd and 24th of May 2014 the IAPA (International Association of Professional Advisers) had their annual meeting in Hamburg where the international network celebrated their 25th anniversary. 34 persons from 16 European tax advising and auditing firms attended the meeting.

The participation of colleagues also from non-member countries at the annual meeting shows the attractiveness of this network as well as the increasing necessity for advisors of medium-sized businesses to gain international know how.

Apart from professional exchange via presentations about international tax law and lectures about changes in tax law in the countries of the IAPA members, Somann & Scheller had the opportunity to present their office to the IAPA colleagues.

The successful event has again emphasized that the members of the IAPA can give their clients fast and first class professional advice because of the intensive co-operation between the offices when it comes to cross-border cases.

Author: Claudia Keidies, Partner at Somann & Scheller, Hamburg


Tax fraud reports in Germany

At the moment you can read a lot about the so called “report to the tax authorities of false or incomplete tax declaration“, where there is no penalty to fear in Germany if one fulfills certain requirements. To avoid the penalty in detail one has to:

1.    Lay open the full amount of the evaded tax in the last five years and
2.    Pay the whole tax debt plus penalty loading supplies plus interests.

Altogether this can be expensive enough already.

If the “report to the tax authorities of false or incomplete tax declaration” is incorrect in any way this can lead to a disaster.

Exactly this could be seen in the case of Uli Hoeneß, former Manager and just resigned president of the FC Bayern München. He was afraid that his name was written on a tax-CD from Switzerland. Therefore his consultants quickly prepared such a tax fraud report. Probably too quick, because it finally failed.

The interesting point about the case of Uli Hoeneß was that – in the beginning – the amount of the evaded tax was expected to be about 1 Mio. €. As soon as the process at the regional court Munich began the amount raised up to 3 ½ Mio. €. After 4 days of processing the amount added up to – listen exactly – 28 Mio. €. This was also exactly the day when the court did not want to inquire anything anymore. Uli Hoeneß got imprisonment for 3 ½ years and – who wonders – he accepted this penalty.

Nowadays there is a huge discussion if it’s appropriate to allow such tax fraud reports at all. At the end the financial administration won – because of the amount of tax income the country receives from those reports.

But most probably such tax fraud reports will be much more expensive in the future. It is planned to tax the last 10 years and the penalty surplus will also rise up.

In any way – we expect to get more such cases up to the end of the year.

Author: Claudia Keidies, Partner at Somann & Scheller, Hamburg


Ruling of the European Court of Justice on Inheritance Law

iapa-conference-london-june-2012_150pxOne of the topics of the Annual General Meeting of the IAPA International Association of Professional Advisers on 25 and 26 May 2011 in London was


Ruling of ECJ on Inheritance Tax

Inheritance and gift tax systems are less harmonised in the EU then other tax laws. This often leads to double taxation in cross-border cases. The EU commission describes in its recommendation of 15 December 2011 various reasons for double taxation scenarios. National tax systems of foreign relief of inheritance taxes have in general limitations. And there is a very limited network of double taxation treaties or no regulations in EU law.

The only protection against double taxation is provided by EU freedom rights of the EU treaty. Prohibited are discriminating measures by EU-member states. Not allowed is also legislation or other legal measures of a member state to restrict EU-freedom rights. There is a wide range of ruling of the European Court of Justice (ECJ) concerning taxation of cross-border transactions but only a limited number of rulings regarding inheritance and gift tax. The ruling of ECJ on inheritance and gift tax is based predominately on the violation of the Freedom to transfer capital. Other freedom rights such as the Right of establishment or Freedom of employees do not play a major role in the court’s ruling.

The ECJ is verifying a violation of EU law always in three steps:

  • Did the transfer of capital take place?
  • Was there a restriction of a free transfer of capital?
  • Is there a justification for a restriction imposed by a member state?

The ECJ considers inheritances, legacies, gifts and foundations always as a capital transfer in this respect. Excluded are only cases where a transaction does not have a cross-border connection. A restriction requires that a non-resident is treated less favourably than a resident in a comparable situation or vice versa, or a citizen of another state is treated less favourably than an own citizen in a comparable situation or vice versa. Important is that the situation is comparable based on objective criteria. But the court ruled that negative tax effects of activities abroad alone do not necessary result in a restriction of freedom rights. Reasons for restricting measures by member states can be the Consistency of tax systems, Measures against tax fraud and tax evasion or the Efficiency of tax collection. In recent rulings the ECJ developed as a new reason the Principle of balanced allocation of power to tax between member states. But the restricting measures must meet certain criteria set by the court. Restricting legal measures by member states often do not meet these criteria.

In recent years there were a few cases on inheritance a gift tax

  • Courts case van Hilden – van der Heijden (ECJ 23/02/2006 – C – 513/03): Dutch inheritance tax on citizens for a period of 10 years after leaving the Netherlands and taking residence in Switzerland is in line with EU law.
  • Court case Jäger (ECJ 17/01/2008 – C 256/06): It is not in line with EU law if Germany imposes different regulations on the valuation of domestic and foreign property (real estate).
  • Court case Arens-Sikken (ECJ 11/09/2008 – C – 43/07): It is not in line with EU law if the Netherlands do not allow a deduction of compensation payments to other heirs as estate debt if the deduction is disallowed only for non-residents.
  • Court case Block (ECJ 12/02/2009 – 67/08): A double taxation is in line with EU law if Spain taxes an estate because cash funds and bonds are deposited at a Spanish bank and Germany taxes the same estate because the descendent was resident in Germany at the time of death. Germany was not obliged to credit the Spanish tax against the German tax.
  • Court case Mattner (ECJ 22/04/2010 – C – 510/08): It is not in line with EU law if Germany grants a lower personal threshold for non-residents than for residents.

The court case Block seems curious. The court ruled that the Freedom to transfer capital is not restricted. But obviously the German regulation is meant to restrict a free capital transfer abroad. It seems that this ruling was a political decision. And one can understand the court’s problem. Which member state is breeching EU freedom rights: Germany or Spain or both?

There is no clear outline in the EU which member state has to avoid or minimise double taxation burdens. But the consequence is that one member state alone is not allowed to breech EU law. But two or more member states together can do it without any negative consequences.

Now the problem of double taxation in inheritance and gift tax law has been addressed by the EU commission in its recommendation dated 15 December 2011. The commission states very clearly that double taxation concerning inheritance or gift tax is not supporting the smooth functioning of the internal market. Revenues from inheritance and gift tax especially from trans-border transactions represent a relatively small share of overall tax revenue of member states while double taxation have a major impact in individuals affected. The commission recommends an EU-system which allows avoiding double taxation scenarios. Whether this recommendation has an impact on the ruling of the ECJ remains to been seen.

Another uncertainty is whether cases with connection to non-member states will be protected by EU law. This is due to the fact that the Freedom to transfer capital is not restricted to the EU. In theory also citizens or residents of non-member states are protected by Article 63 EU treaty. And also property outside of the EU might be protected. The ECJ will be able to clarify whether the Freedom to transfer capital will also be applicable in cases with connection to non-member states. The Bundesfinanzof (highest German fiscal court / BFH 15/12/2010, II R 63/09) asked the ECJ whether business property situated in Canada can be valued for inheritance tax reasons at a higher level than property situated in Germany.

Unclear is also whether Swiss citizens can claim the same rights as EU citizens based on the non-discrimination clause of the Agreement of free movement and settlement between Switzerland and the EU.

Author: Peter Scheller Hamburg www.somannscheller.de


Living and working in Germany: Personal income tax of individuals moving to Germany

Foreigners often have a misconception of their tax situation if moving to Germany and working there.

Here are typical issues often misunderstood:

  1. Very often foreign employees coming to Germany think that their foreign source income is not subject to German income taxation. This is a misjudgement. Foreign source income is either taxable in Germany or it effects the progressive German income tax rate. In both cases the income has to be declared in the German income tax return.
  2. The calculation of foreign source income has to follow German legal requirements. This may require a recalculation of foreign source income. This is especially the case for business and rental income (for example recalculations of depreciations or capital allowances).
  3. Foreign income taxes including withholding taxes can be deducted against German income tax if foreign source income is taxed in Germany.
  4. It is also not correct to believe that being tax resident in Germany is unfavourable compared to a situation where somebody receives German based salaries as non-resident. This is due to the fact that non-residents cannot claim various allowances and personal expenses. A careful tax planning is advisable.
  5. Germany has the reputation of being a high tax jurisdiction. This may be the case for individuals with high income. The tax burden on lower or average income is endurable. And German tax law is less strict concerning the deduction of income related expenses than most neighbouring countries. Additionally it provides a wide range of personal allowances and a liberal acceptance of private expenses. Foreign individuals are often surprised by the relatively low tax burden on average income. The real problem is social security liability if applicable. The social security contributions are one of the highest in Europe. Individuals coming to Germany should always seek advice on whether or not they can avoid German social security contributions.
  6. Foreigners often think that personal payments to foreign organisations or insurance companies cannot be deducted. That again is a wrong impression. Payments to foreign pension schemes, private health insurance, private accident insurance, personal liability insurance etc. may very well be deductible in Germany.
  7. A special problem arises from employment income related to stock options. Respective benefits will be taxed in Germany under certain conditions. Taxed will be the difference between the value at the time of purchasing the stocks and the value at the time when the options have been granted. For the allocation of taxation rights the time between granting the options and the vesting time (vesting period) is applicable. This means that if somebody worked for an employer in the vesting period in different countries he may have to pay taxes in these countries. Example: The vesting period was 2 years. For one year employee worked in the USA and for the other year he worked in Germany. Than half of the benefit will be taxed in the USA and the other half in Germany.

We have developed a checklist “Foreign citizens working in Germany – Required documents and information” to file a German income tax return. The checklist can be ordered free of charge at our German office (www.iapa-online.com/hamburg-germany).


Doing business in Germany: Keeping and storing books and records abroad

On January 1, 2009 Germany introduced the possibility for German tax payers to install electronic bookkeeping outside of Germany. This enables German companies and subsidiaries of foreign entities to outsource IT infrastructure and accounting and payroll processes to other countries. The limitation to EU/EEA-countries has been abolished by the end of 2010.

Note: This regime only applies to electronic books and records. Paper documents such as annual financial accounts, opening balance sheets but also in- and outgoing invoices have to be kept in Germany. This restricts the possibilities to transfer the entire bookkeeping abroad.

The following requirements apply:

  • The taxpayer has to inform German tax authorities where electronic bookkeeping is conducted. If a service provider is assigned to do the bookkeeping his name and address has to be reported to the tax authorities.
  • The taxpayer has to fulfil special obligations in regard to participation in tax audits and documenting business transactions.
  • Tax authorities must have full access to all electronic books and records.
  • Taxation shall not be negatively affected by the transfer of electronic books and records abroad.

German tax authorities may grant permission to transfer electronic bookkeeping abroad. The application has to be made in writing. The following information is required:

  • Detailed enumeration and description of electronic books and records to be transferred abroad
  • Description of the bookkeeping process
  • Description of facts which allows the tax authorities to verify above mentioned requirements

Foreign Service provider who is conducting the bookkeeping for a German company has to follow German accounting standards. Provisions of German commercial and tax law have to be considered. And he has to follow the special regulations of the Principles of proper IT-based Accountancy Systems (Grundsätze ordnungsmäßiger DV-gestützter Buchführungssysteme).

German tax authorities have the right to audit data produced by means of data processing systems (EDP systems). There are three forms of data access:

  • Audit of stored data by using the taxpayer’s EDP system (access form: Z 1)
  • Computer evaluation by instructing staff of the tax payer using EDP system (access from: Z 2)
  • Demanding a data medium such as a CD with tax relevant data, documents and records (access form: Z 3)

In practice only access form Z 3 is used by tax inspectors when auditing smaller companies. The special rules of the Principles of Data Access and Auditability of Digital Records (GDPdU) have to be followed by the foreign service provider.

If the company and/or its service provider is not complying with the requirements under this regime fines in a range between € 2,500 and € 250,000 may be imposed. And the tax authorities have the right assessing taxes based on estimates.


Scientific Co-operation in International Tax Law

Tax law is a field of scientific research. And there are co-operations of universities from different countries. On 4 March 2011 the second Joint Seminar of the following universities will take place in Hamburg :

  • University of Hamburg (Course of studies: Master of International Taxation)
  • Universita die Roma Sapienza (Course of studies: Master in Pianificazione Tributaria Internazionale)
  • Guardia di Finanza – Corso Superiore die Polizia Tributaria

The seminar will cover the following topics:

  • Transparancy and Exchange of Information with “Tax havens”
    • The legal Framework for Exchange of Information
    • Domestic Measures against the improper use of tax havens
  • The Domestic Legislation against Tax Havens
    • Constitutional , EU and International Framework of Mutual Assistance in Tax Matters
    • The Single Instruments (New Rules and Critical Issues)

Co-ordinators are the professors Gerrit Frotscher and Pietro Selicato.

Speakers from the IAPA are involved and will cover the following topic:

Domestic Measures against the improper use of tax havens


Living and working in Germany: Trusts of expatriates can cause havoc

After World War II Germany became an immigrant country. Today more than 10 million people of Germany’s population are immigrants or second generation children of immigrants. Immigration has also its tax impacts.

A special tax problem occurs quite often with individuals form the USA or Anglo-Saxon countries when they come to live in Germany. Quite a few of them are beneficiaries of trusts.  The German tax regime of trusts is very unfavourable. This is due to two facts.

Germany’s civil law does not know this legal form. Therefore there exists uncertainty about the legal status of trusts. The second reason for the unfavourable taxation is the fact that German individuals tried to avoid high German tax burdens in the sixties and seventies of the last century by setting up trust in tax havens. This resulted in a punishing anti-avoidance tax legislation. Unfortunately German tax law does not distinguish between Germans who try to avoid taxes and foreigners coming to Germany. Trusts which have been set-up to benefit the latter were often not constructed to avoid taxation. Or if so this was legally accepted by their domestic tax system.

The tax regime of a trust in Germany depends mainly on its legal structure. If the settlor or a beneficiary is the beneficial owner of trust’s funds the trust will be treated as transparent for tax purposes. The high fiscal court of Germany (Bundesfinanzhof / BFH) ruled in a case regarding a Liechtenstein Stiftung as follows. In this case the settlor was able to control the trust. He had the right to appoint or remove trustees and to transfer all funds back to him or to third parties. The BFH classified the Liechtenstein Stiftung as transparent. The same tax treatment shall apply for trusts.

The tax situation of beneficiaries of transparent trusts being resident in Germany is as follows:

  • The beneficiary’s part of trust income will be subject to German income taxation if not denied by a double taxation treaty. Especially dividends, interests and other income from capital funds are subject to German taxation. Business or rental income might be tax free under provisions of the respective double taxation treaty.
  • Transfers of funds of the beneficiary to the trust or repayments to the beneficiary will not be subject to German income or inheritance and gift tax.
  • A serious problem can be the crediting of foreign taxes at source. This can apply for instance if the trust receives dividends from foreign sources and the foreign country imposes a withholding tax on these dividends. German tax regulations or provisions of the respective double taxation may deny the full crediting of the withholding tax on German income tax.

A beneficiary of an in-transparent trust might face far more severe tax implications if being resident in Germany. This especially applies for irrevocable trusts. The following tax implications might follow:

  • The transfer of funds to the trust by the settlor or beneficiary is subject to German gift tax. The very unfavourable tax class III is applicable (low allowances, tax rates between 30% and 50% on transferred funds).
  • Payments of the trust to the beneficiary who is resident in Germany can be subject to German income taxation under certain circumstances. And all payments of the trust will be subject to German gift tax. This extensive tax regime might result in a double taxation if payments are subject to German income and gift tax.
  • And the above mentioned problem of crediting foreign withholding taxes against German income tax is even more severe.
  • There are special provisions for so called family trusts. But in general they are not applicable for beneficiaries coming from abroad.
  • Double taxation treaties might provide a certain support against extensive double taxation. This is especially the case where German double taxation treaties with countries from the Anglo-American world have special provisions regarding the taxation of trust. But there is little support in regards to inheritance and gift tax since Germany’s only double taxation treaty in this respect has been agreed with the USA.
  • Citizens of EU-member states such as Great Britain or Ireland might be able to seek help in front of German courts if they are subject to extensive taxation. The German regulations might not be in line with European freedom rights.

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de


German Taxation: Tax legislation not in line with EU law?

Politically Germany is one of the driving forces of European unification. But all good intentions seem to vanish if money is involved. In this respect Germany’s finance minister is no different from others. He is responsible for drafting tax laws with doubtful EU-comparability.

A good indication that German tax law is not in line with EU law is the sheer number of cases in front of the European Court of Justice. No other European country produces more cases in regard to direct taxes. In the last ten to fifteen years Germany lost a lot of cases. And it looks as though many more are to follow. A German professional magazine publishes every year a list of tax provisions which might not be in line with EU law. This year’s list names 146 different provisions! And this list does not contain potential cases on indirect taxes such as Value Added Tax (VAT) or excise taxes on energy, tobacco or alcohol.

German tax law discriminates in certain cases against foreign enterprises as well as individuals. Anti-discrimination provisions of the EU-treaty are

  • General freedom right/Right to choose residence
  • Freedom for employees
  • Freedom of trade
  • Freedom to conduct services
  • Right of establishment
  • Freedom to transfer capital funds

For business activities e.g. the following German regulations can be subject to court cases:

  • Deduction of foreign losses
  • German thin capitalisation-regulations
  • Capital gains taxation if assets are transferred abroad
  • Taxation at source of dividends and profit distributions
  • German CFC-regulations
  • German restructuring regulations

The following German taxation of individuals may breech EU freedom rights:

  • Deduction of foreign losses
  • Deduction of personal allowances
  • Taxation of foreign investment funds
  • Extensive double taxation concerning inheritances and gifts

Enterprises and individuals from other EU-countries have good chances to argue against discriminating tax regulations. For enterprises and individuals resident in non-EU countries such as the USA or Switzerland, it is much more difficult to achieve protection of EU anti-discrimination jurisdiction. But it is not impossible. This is due to the fact that the Freedom to transfer capital funds provides cover to respective world-wide activities. Companies and individuals from non-EU countries who are subject to German taxation and feel discriminated by German tax legislation should always check whether appeals against tax assessments could prove to be successful.

But to be fair it has to be said that in recent years a lot of German tax provisions have been brought in line with EU law by the German government. But in many cases it was only after Germany lost cases in front of the European Court of Justice or German fiscal courts.

Glossary

Finance minister Finanzminister
European Court of Justice Europäischer Gerichtshof (EuGH)
Value Added Tax (VAT) Umsatzsteuer (USt)
Excise taxes Verbrauchsteuern
Thin capitalisation-regulations Zinsschranke
Controlled foreign corporation (CFC)-regulations Hinzurechnungsbesteuerung
Restructuring regulations Umwandlungssteuerrecht
General freedom right/Right to choose residence Allgemeines Freiheitsrecht/Recht auf freie Wohnsitzwahl
Freedom for employees Arbeitnehmerfreizügigkeit
Freedom of trade Warenverkehrsfreiheit
Freedom to conduct services Dienstleistungsfreiheit
Right of establishment Niederlassungsfreiheit
Freedom to transfer capital funds Kapitalverkehrsfreiheit
Inheritance and gift tax Erbschaft- und Schenkungsteuer

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de


Doing Business in Germany: Companies and partnerships

Traditionally Germany’s economy is based on small and medium-sized enterprises. These companies employ over 60% of the German work force. And these companies have a fair share in Germany’s position as second biggest exporting country in the world. Enterprises of other countries who want to establish business relations with German enterprises should not only concentrate on the big multinational enterprises. In certain industry sectors medium-sized companies can be the better choice to find a suitable business partner.

Large German companies have the legal form of an Aktiengesellschaft (AG), the German equivalent to an Incorporation in the Anglo-American legal systems. Small and medium sized businesses often choose the form of a Gesellschaft mit beschränkter Haftung (GmbH), equivalent to a Limited liability company. Both legal forms are corporations with own legal identity.

But a lot of small and medium sized enterprises in Germany are legally organised in the form of a trading partnership (Personenhandelsgesellschaft). This very often confuses business partners especially from Anglo-Saxon countries since there partnerships are seldom used for business purposes. The translation of the term Personenhandelsgesellschaft is a little bit misleading. A better translation would be not-incorporated trading company with partners as shareholders.

The basic forms of partnerships are the offene Handelsgesellschaft (oHG) and the Kommanditgesellschaft (KG). These legal forms require the unlimited liability of all partners (oHG) or of at least one partner (KG). Because of the unlimited liability of partners these legal forms are seldom used.

But often used is a GmbH & Co. KG. This is a combination of a GmbH and a KG. The KG is the operating unit. The GmbH’s only purpose is to be unlimited liable partner of the KG. Shareholders of GmbH and KG are in general the same persons.
legal-structure-of-a-gmbh-co
With this legal structure owners or investors can avoid unlimited liability but also use the less strict legal framework of partnerships.

The tax regime for corporations and partnerships is different.

Corporations (GmbH and AG) are subject to corporation income tax (Körperschaftsteuer / tax rate: 15%) and solidarity surplus charge (Solidaritätszuschlag / tax rate: 5.5% of corporation tax) and the municipal business tax. The combined tax rate on profits is between 28% and 32%. Dividends derived by individuals are taxed in general at a rate of 25% plus solidarity surplus charge. 95% of dividends to corporations are tax exempt. The latter applies also for foreign corporations.

Partnerships (oHG or KG) are treated for tax purposes as transparent entities. Consequently profits of partnerships are taxed as business income by individuals. Individual income is imposed at progressive income tax rates. Maximum income tax rate is 45% plus solidarity surplus charge. If partners are corporations their profit shares are taxed as regular income. The partnership itself is subject to business tax.

Business tax (Gewerbesteuer) is imposed by the municipalities. The taxable income for business tax is generally determined by the taxable income with certain adjustments. Municipalities can fix tax rates individually. This results in higher tax burdens in the big German cities and lower rates in surrounding areas. Sometime it might be suitable to situate own business activities outside of the big cities. The business tax rates vary from 13% to 17%.

Germany does not allow free choice of the tax regime for corporations and partnerships such as the US check-the-box-treatment.

Glossary

Corporation Körperschaftsteuer
Trading partnership Personenhandelsgesellschaft
Incorporation Aktiengesellschaft (AG)
Limited liability company Gesellschaft mit beschränkter Haftung (GmbH)
Unlimited partnership offene Handelsgesellschaft (oHG)
(Partly) limited partnership Kommanditgesellschaft (KG)
Limited partnership GmbH & Co. KG
Individual income tax Einkommensteuer
Corporation income tax Körperschaftsteuer
Solidarity surplus charge Solidaritätszuschlag
Business tax Gewerbesteuer

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de