In one of the largest nationwide investigations into possible tax evasion involving more than 100 defendants, the Augsburg public prosecutor's office recently searched residential and business premises in Germany, Austria and Switzerland as part of a large-scale raid. The allegations made relate to an investment concept that has long been known as the "Goldfinger model" and has already triggered changes to the law and been the subject of supreme court financial judgements.

How does Goldfinger work?

Under the Goldfinger model, investors invest in a foreign company established in a DTA state that trades in gold. The profits and losses are only taxed abroad in accordance with the DTA regulations; however, they have an effect in Germany via the so-called progression proviso on the tax rate that is relevant for other income subject to tax in Germany. The purchase of physical gold into current assets can significantly reduce the tax rate on income taxable in Germany for German investors due to the immediate posting of expenses as part of the determination of profits by means of an income surplus calculation. Although the gains from a subsequent sale of gold generally have the effect of increasing the tax rate, this hardly has any tax-increasing effect for German taxpayers who already pay the top tax rate.

The Legislator has in 2013 put an end to the Goldfinger model (at that time newly inserted § 15b para. 3a, § 32b para. 1 sentence 3, para. 2 sentence 1 no. 2 sentence 2 subpara. c EStG).

The Federal Fiscal Court (BFH) has accepted the Goldfinger models in the highest court (see BFH, judgements of 19 January 2017, IV R 50/13 and IV R 50/14). It is a legal arrangement and the intended tax effects are correct in terms of substantive law. Furthermore, the model does not constitute an abuse of legal structuring options within the meaning of Section 42 AO, as the taxpayer is free to choose a specific legal form and a specific period for purchases shortly before the end of the year. The BFH confirms its case law according to which a taxpayer is permitted to organise himself in such a way that he has to pay as little tax as possible. The BFH also states that prior to the introduction of the above-mentioned legislative reactions in the form of specific abuse standards, it was not possible to qualify the arrangement as tax avoidance.

If Goldfinger arrangements were therefore legally unobjectionable in the relevant period and, based on supreme court rulings, are not to be regarded as tax avoidance or abuse of structuring, how can it be that the public prosecutor's office can be charged with suspicion of tax evasion? Tax evasion determined? Can a legal, accepted tax structuring model result in tax evasion subject to penalties?

Punishable despite approval under substantive law?

Yes, this may be the case. This is because possible criminal tax law consequences of tax structuring must be examined independently of the question of whether there is an abuse of structuring in accordance with Section 42 AO. Even if there is an abuse of structuring in accordance with Section 42 AO, this does not initially have any direct consequences under criminal law; this must be examined separately. The aim of Section 42 AO is to help enforce the tax claim and relates to the tax assessment. Tax evasion, on the other hand, is a criminal offence. A different standard of review must be applied here - questions of guilt and intent must be clarified - and it is a matter of sanctioning behaviour that is legally defined as reprehensible. Therefore, criminal tax offences can also be committed in the context of a legal investment structure that does not qualify as an abuse of structuring.

Whether an investor commits tax evasion initially depends on the facts actually realised and, in particular, on whether the investor has fully and truthfully disclosed the facts to the tax authorities. According to Section 370 para. 1 no. 1 AO, anyone who provides the tax authorities with incorrect or incomplete information about facts relevant to tax law is liable to prosecution. Pursuant to Section 370 (1) no. 2 AO, anyone who fails to disclose tax-relevant facts to the tax authorities in breach of duty is liable to prosecution. This is aggravated by the fact that the taxpayer has an increased duty to co-operate in foreign matters, so that concealment tactics have a particularly negative effect here. Just because the BFH has accepted the Goldfinger structure under substantive law in specific cases and has not qualified it as an abuse of structuring, it cannot be concluded from this that comparable but completely different investment structures are equally unobjectionable under all circumstances. It therefore depends on the specific circumstances and, in particular, the complete declaration of these circumstances in the tax return.

It depends on the presentation of the facts

It cannot be ruled out that, in practice, gold finger models do not fulfil the necessary requirements in terms of the business activities and substance of the foreign companies. In order to achieve the above-mentioned intended tax consequences, it is of central importance, for example, that the right of taxation with regard to gold trading actually lies abroad. This is ruled out, for example, if the foreign company does not carry out any original commercial activity, but only asset management, or if the management was not actually carried out abroad. In many cases, the market participation, public image and entrepreneurial risk required for a commercial gold trader could be lacking. This is also consistent with press releases according to which the public prosecutor's office is apparently investigating suspicions that the companies used could be front companies or letterbox companies.

So can the mere incorrect establishment of an investment structure and the non-fulfilment of substantive legal requirements with regard to business activities already constitute the offence of tax evasion? Certainly not when viewed in isolation. There must be other decisive factors: In particular, the taxpayer must have breached its disclosure obligations to the tax authorities or otherwise presented incorrect or incomplete facts in its tax return, e.g. by providing incorrect information about the business activities of the companies or by not giving the tax authorities the opportunity to make an independent legal assessment by fully presenting the facts that have actually been realised. Even if the taxpayer has a different legal opinion, the tax authorities must be given the opportunity to comprehensively examine the actual facts in order to avoid committing tax evasion.

Affected taxpayers should contact an expert who has experience with subsequent declarations in the area of capital investments or international business activities in good time before an impending investigation. If a tax investigation is already underway, the first decisive factor is whether this is only taking place as part of (coordinated) special investigations by the tax authorities or whether criminal tax proceedings have already been initiated. Although in the latter case it would no longer be possible to make a voluntary disclosure to avoid prosecution, counselling is also essential in ongoing criminal tax proceedings to avoid further disadvantages. In these and other cases of aggressive tax planning, those involved should carefully check with their advisors whether a voluntary disclosure makes sense. After all, this can possibly lead to impunity or at least greatly reduce the likelihood of house searches being carried out.

Dr Thomas Elser and Dr Frank Thiede are tax advisors at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.

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