Tax & Legal

Tax & Legal

Promoting electrical mobility: Further tax relief for private use of electric-powered cars

On November 17, 2016 a new law came into force providing for tax incentives (income tax / employee withholding tax) in the area of electrical mobility, namely for electric-powered cars and hybrid vehicles. The Federal Finance Ministry has issued a decree dealing with Details of the new regulation. Continue reading

Bundesrat gives its assent to the packet of measures against profit reduction and profit shifting.

In its last session of the year, the Federal Assembly (Bundesrat) gave its assent today to the Act to Implement the Amendments to the EU Mutual Assistance Directive and to Introduce Further Measures to Combat Profit Reduction and Profit Shifting

This packet of measures, which will come into effect on 1 January 2017, will give almost € 25 billion worth of relief to taxpayers. In particular low earners, families and lone parents will benefit.

The Bundesrat also gave its assent to the law amending the rules regarding the utilisation of losses upon change of control. (See our Blog:

Federal Ministry of Finance publishes draft bill to combat tax avoidance

The Federal Ministry of Finance has published its draft bill to combat tax avoidance and to amend further tax provisions. Through this draft bill, the prime goal of the Federal Government is to make it more difficult for domestic taxpayers to avoid tax through the use of an offshore company. In addition to increasing the taxpayer’s obligations to cooperate, the new draft also proposes an end to bank secrecy in tax matters. The cabinet will probably give its approval to the draft bill on 21 December 2016.

The goal of the draft is to enable the tax authorities to obtain comprehensive information on business relationships between German taxpayers and offshore companies located in tax havens through the provision of new investigatory powers. The draft bill includes the following measures:


Disclosure requirement upon the acquisition of qualified investments

The existing legal requirement to disclose the acquisition of qualified investments in foreign entities is to be standardised for both direct and indirect holdings. In addition the draft provides for an extension of the deadline for the filing of the disclosure to the date of the filing of the income tax/corporation tax returns.


Disclosure requirement for directly or indirectly controlled partnerships, companies, associations and estates in third countries

In future a taxpayer will also be obliged to disclose any business relationships it has with a partnership, a company, an association or an estate located in a third country, which he controls either directly or indirectly. This will be regardless of whether the taxpayer formally holds an interest in the entity or not. Failure to disclose will lead to a delay of the commencement of the period in which the assessment of tax is permissible and thus the limitation period will be extended. In addition, a penalty of up to € 25,000 may be levied in cases of non-disclosure.


Liability of financial institutions for tax deficits

In future, under certain conditions, financial institutions will be obliged to inform the tax authorities about business relationships between domestic taxpayers and entities resident in third countries where the relevant financial institution has either set up the business relationship or has acted as a mediator. A failure to do so may result in the financial institute being held liable to make good any tax deficits arising therefrom. Furthermore a penalty of up to € 50,000 may be levied.


Repeal of the bank secrecy provision in tax matters

According to the draft bill the provision regarding so-called bank secrecy in tax matters should be repealed. This expressly does not affect civil law bank secrecy, which protects the transmission of data by banks to, for example, other businesses. Whilst the existing bank secrecy rules did not give the banks a blanket right to refuse to provide the tax authorities with information, it certainly did encroach on the tax authorities’ investigatory powers.


Extension of the automatic account data access procedure

The automatic account data access procedure for tax purposes should be extended. The new rules are intended to facilitate investigations in cases where a domestic taxpayer has the power to dispose over or is the economic beneficiary of an account or a deposit of an individual, a partnership, a company, an association or an estate, which has his/its residence, his/its customary place of abode, its registered office, its main branch or its place of management abroad. Furthermore the term during which credit institutes are obliged to keep data access on closed accounts available, should be extended to 10 years.


Collective disclosure requests

The options available to the tax authorities for making collective disclosure requests is to be codified on the basis of the settled case law of the Supreme Tax Court.


Collection and recording of identification for tax purposes

In the course of their identity checks, credit institutions should in future also collect and record the tax identification features of the account holder and any person with a power to dispose over the account. This information will be provided exclusively to the tax authorities through the account data access procedure. Previously the so-called identity check was limited to names and addresses.


New records retention requirements

A new records retention obligation should be imposed on taxpayers, who can alone or together with related persons, directly or indirectly exercise a controlling or decisive influence in commercial law matters or in financial or business matters on an entity resident in a third country. In future such taxpayers may be subject to a tax audit without the requirement of a special reason.


Inclusion in catalogue of particularly serious tax evasion offences

The evasion of tax through hidden business relationships with entities resident in third countries and controlled by the taxpayer should be included in the catalogue of particularly serious tax evasion offences. This would mean that the limitation period for criminal prosecution for this form of avoidance would be extended to 10 years.

Tax administration stresses the need for an effective Tax Compliance System

For the first time the German tax administration publicly raised the issue of an internal control system for tax purposes to ensure tax compliance. However, the corresponding Implementation Decree published on May 23, 2016 leaves many questions open and neglects to point out what the companies should be prepared for in the future.

The tax environment has significantly changed for companies in last few years due to the tightening of regulations and administrative practices, as well as the position taken by the courts. The documentation and reporting requirements and tax compliance in the area of wage tax, VAT and transfer pricing have increased. This has been fueled by recent developments and discussions on BEPS (Base Erosion and Profit Shifting), dealing with tax-driven profit transfers, and the publicised tax evasion cases, followed by improved systems of information exchange and of detection and, of course, the subsequent tightening of the rules on tax evaders. The current handling of doubtful cases and errors (mistakes) will obviously no longer be tolerated by the tax administration. Up to now it was more or less “common practice” that any such shortcomings could be corrected in the course of a tax audit or by submitting amended tax returns at leisure. That is no longer acceptable to the tax authorities. It is to be expected that, due to internal instructions, that the tax auditors will forward their findings to the competent tax investigation team even in the case of small inconsistencies. Even the submission of a “simple” (straightforward) amendment of tax returns could be viewed as fraud or a voluntary self-disclosure of tax evasion.

The tax authorities are already asking for an adequate organizational structure for compliance. This issue has now been taken up in an official administrative implementation decree issued on May 23, 2016 on Sec. 153 for the Fiscal Code (Abgabenordnung – AO). Section 153 Fiscal Code deals with the correction of returns and the duties of taxpayers. The actual wording of the provision:

Sub-sec. 1: “Where a taxpayer subsequently realises before the period for assessment has elapsed that a return submitted by him or for him is incorrect or incomplete and that this can lead or has already led to a reduction of tax (…) or that a tax was incorrectly paid he is obliged to indicate this omission without undue delay, and to make the necessary corrections. This obligation shall also apply to the taxpayer’s universal successor and the persons acting for the universal successor or the taxpayer pursuant to sections 34 and 35”.

Sub-sec. 2: “The duty of notification shall also apply where the conditions for a tax exemption, tax reduction or other tax privileges subsequently cease to exist, whether in full or in part.”

Sub-sec. 3: “Whoever wishes to use goods for which a tax privilege has been granted subject to a condition and in a manner which does not correspond to this condition must inform the tax authority accordingly and in advance.”

In the administrative Implementation Directive of May 23, 2016 the differences between a correction of a tax return and a voluntary disclosure of tax evasion are explained. For the administration the implementation of an internal control system would initially be taken as evidence against any intentional or negligent tax evasion – but always under the proviso that each case be viewed and checked separately. With its decree the tax administration – for the first time – publicly addresses the need for an internal control system. However, no further explanations of what exactly is meant are to be found in the decree.

For that matter the Institute of Chartered Accountants (IDW) was asked by the tax administration for further assistance and the institute drafted some practical – but rather technical –initial clues as to the implementation of a Tax Compliance System (TCS) and which was then published in its IDW Practice Pronouncement No. 1/2016 from June 22, 2016. The IDW comments on TCS are currently discussed among the professional associations. The IDW regards the internal control system as an integral part of an overall Compliance Management System (CMS). However, clear standards for a TCS are neither given by the Finance Ministry nor the IDW, both apparently taking into account the complexity and different corporate structures as the companies themselves are asked to set up a viable TCS specifically tailored to their business.

On the other hand, the tax administration emphasizes that there would be no disadvantages if a TCS has not been set up. Rather the companies would only benefit from its implementation as it will then avert the first impression of any intentional act. It should however be borne in mind that presently the implementation of a TCS is neither a legal requirement nor is it required under a statutory provision in the German tax law. The future reaction by the tax officials to all this remains to be seen. Time will tell.