Fight against tax fraud with shell companies

In addition to comprehensive notification and reporting obligations for business relationships abroad, a new law also brings about a general abolition of fiscal banking secrecy.

In December, the German government passed the draft of an "Act to Combat Tax Avoidance and to Amend Other Tax Regulations" and forwarded it to the Bundestag. The law is the consequence of the "Panama Papers" that became known in 2016.

The Act is intended to make it significantly more difficult for domestic taxpayers to avoid taxes via letterbox companies in tax havens. To this end, it introduces extended obligations for taxpayers to cooperate, new reporting obligations for banks and more comprehensive investigative powers for the tax authorities. It is this last point in particular that will have consequences for all taxpayers, even if they do not maintain business relationships abroad. The only thing that will continue to be ruled out is a warrantless "dragnet" investigation of banks.

In addition, the Act contains a number of minor corrections to tax law resulting from rulings by the European Court of Justice. These are primarily changes to the inheritance tax allowances for persons with limited tax liability. The law is now being debated by the Bundestag and Bundesrat and is expected to enter into force immediately once it has been passed. We have summarized the main contents for you below.

• Duty to report: In the future, taxpayers will have to report their business relationships with third-country companies - regardless of whether they have a formal stake in the company. Third-country companies are all companies with their registered office or management in states or territories outside the European Union or the European Free Trade Association. It is irrelevant whether and, if so, to what extent these companies engage in significant economic activities. In the event of a deliberate or reckless breach of this duty of disclosure, a fine of up to 25,000 euros may be imposed. In addition, the breach of duty suspends the start of the tax assessment period and thus the statute of limitations.

• Notification obligation of the bank: In the future, banks will have to notify the tax authorities of business relationships established or brokered by them between domestic taxpayers and third-country companies under certain conditions. In the event of a deliberate or reckless breach of this duty to cooperate, the financial institutions will be liable for any tax losses caused as a result. In addition, a fine of up to EUR 25,000 will also be introduced here in the event of a breach of duty.

• Bank Secrecy: The so-called fiscal banking secrecy will be abolished without replacement. Banks will then have the same rights and obligations vis-à-vis the tax authorities as other persons obliged to provide information. In future, the tax authorities will therefore be able to address individual requests for information or collective requests for information to domestic banks in the same way as they have been able to do to other persons. However, unprovoked investigations of banks will continue to be inadmissible in the future.

• Account Retrieval Procedure: The automated account retrieval procedure for taxation purposes is to be expanded in order to be able to determine in which cases a domestic taxpayer is the person entitled to dispose of or the beneficial owner of an account or securities account of a natural person, company, corporation, association of persons or estate domiciled outside the scope of the German Fiscal Code. In the future, banks will have to store the data for ten years after an account is closed.

• Legitimacy check: During the legitimation check, banks are also to request and record the tax identification feature (tax ID number) of the account holder, any other person authorized to dispose of the account, and any other beneficial owner. The tax authorities can then request this data in the account retrieval procedure.

• Retention requirement: A new retention requirement is created for all persons who, alone or together with related parties, may directly or indirectly exercise a determining influence over the corporate, financial or business affairs of a third country company. Records and documents relating to this business relationship and all related income and expenses must be kept for six years. In addition, an external audit of the persons concerned will be permissible in the future even without special justification.

• Tax evasion: In the future, a particularly serious case of tax evasion will be deemed to exist, among other things, if the taxpayer uses a third-country company to conceal tax-relevant facts and in this way continues to evade taxes or obtains unjustified tax advantages. The ten-year statute of limitations for criminal prosecution also applies to this.

• Statute of Limitations: The statute of limitations for payment in cases of tax evasion is to be generally extended from five to ten years.

• Inheritance tax allowances: If only the assets are located in Germany, but the donor/decedent and recipient/heir both reside abroad, there has so far only been an allowance of 2,000 euros for these assets - regardless of the degree of relationship. It is true that the recipient or heir can request that the transaction be treated as subject to unlimited tax liability. He or she would then be entitled to the correspondingly higher tax-free amounts of up to 500,000 euros, but this would mean that the entire estate would be subject to inheritance tax, and not just the part located in Germany. However, this application option did not satisfy the European Court of Justice. Therefore, limited taxpayers now also receive the general allowances. However, these are reduced proportionately if not all of the inherited or received assets are taxed, but only the domestic assets contained therein.

• Utility allowance: The so-called "special pension allowance" for inheritance tax was previously only available to the surviving spouse or civil partner and children in the case of unlimited tax liability. Here, too, the European Court of Justice has raised objections, which is why all heirs are now entitled to the pension allowance, even if they only have limited tax liability.