With the German Act to Combat Tax Avoidance (StUmgBG), the German government is pursuing the goal of creating transparency regarding certain business relationships between domestic taxpayers and third-country companies. In response to the publication of the Panama Papers, the new law primarily aims to make the use of letterbox companies for the purpose of tax evasion more difficult. The law passed the Bundestag with amendments on 27 April 2017. The Bundesrat passed the law on 2 June 2017.

New reporting and notification obligations will be introduced for taxpayers and banks, particularly for situations in countries outside the EU or the European Free Trade Association (EFTA) ("third countries"). Compliance with these new obligations is to be enforced through stricter penalties and control options for the tax authorities. By excluding EFTA countries (Iceland, Liechtenstein, Norway and Switzerland) from third countries, the law is primarily aimed at classic offshore locations outside Europe, while within the EU and EFTA, the exchange of information as well as administrative and legal assistance will increase the transparency of foreign relationships.

Abolition of fiscal banking secrecy

The law (finally) abolishes tax-related banking secrecy with the repeal of Section 30a AO. Collective requests for information to credit institutions are now possible under the new Section 93 (1a) AO. It is now sufficient to make enquiries about a number of facts that are still unknown to the tax authorities if the tax authorities can identify persons who are not yet known, there is sufficient reason for the enquiries and other reasonable measures to clarify the facts do not promise success. The legal text contains numerous undefined legal terms; the explanatory memorandum refers to extensive case law in this regard. According to the explanatory memorandum, there is no intention to extend the scope of investigations. For a collective request for information, it should be sufficient for the tax authority to come to the conclusion that the information is likely to lead to the discovery of tax-relevant facts as part of a prognosis decision by way of an anticipated assessment of evidence at its due discretion. This opens up a wide scope for interpretation.

Investigations "in the blue", dragnet searches and searches for information remain inadmissible in contrast to the collective requests for information.

The measure of collective requests for information is serious and grants tax investigators considerably increased investigative powers. It is suitable for enabling significant encroachments on fundamental rights. It is therefore surprising that the provision is not more specific and that the explanatory memorandum refers to case law.

Notification and reporting obligations of the taxpayer for third-country companies

The new Section 138 (3) AO introduces the term "third-country company". This refers to a partnership, corporation or similar that has its registered office or management in countries outside the European Union or the European Free Trade Association ("EFTA").

In addition to the existing obligation to report the establishment or acquisition of businesses or permanent establishments abroad and the acquisition of shares in companies, a reporting obligation will also be introduced for cases in which a taxpayer can directly or indirectly exercise a controlling or decisive influence on the corporate, financial or business affairs of a third-country company for the first time.

The existing reporting obligations will also be expanded. For example, when acquiring and now also selling shareholdings in a corporation, association of persons or asset pool with its registered office and management abroad, a notification must be submitted from a shareholding of at least 10 per cent instead of the previous minimum of 25 per cent. In addition, direct and indirect shareholdings must be added together. As an alternative to the percentage shareholding of at least 10 per cent, the acquisition or disposal of direct and indirect shareholdings with a total value of more than EUR 150,000 will result in a reporting obligation.

From a procedural point of view, the submission of the notification is somewhat simplified in that the notification no longer has to be submitted within five months of the end of the calendar year of the reportable event, but as a rule together with the income or corporation tax return. Domestic taxpayers who are not obliged to submit a tax return must submit the notification using the official form within 14 months of the end of the year in which the reportable event occurred.

A breach of the notification obligation can be penalised with a fine of up to EUR 25,000 (Section 379 (2) and (4) AO new version).

The extended reporting obligations apply to circumstances that occurred after 31 December 2017. Circumstances that continue to exist after 1 January 2018 must be reported with the 2018 tax return.

Third party notification obligation

A new reporting obligation also applies to certain financial companies that have brokered relationships between a taxpayer and third-country companies (Section 138b AO new version). This includes those obliged under sections 2 (1) nos. 1 to 2a and 3 GWG. They must notify their tax office of any relationships they have established or brokered between domestic taxpayers and third-country companies which, together with any related parties within the meaning of Section 1 (2) AStG, directly or indirectly give the domestic taxpayer a controlling or determining influence over the corporate, financial or business affairs of a third-country company for the first time. A notification obligation also applies if the domestic taxpayer acquires a direct interest of at least 30 per cent in the capital or assets of the third-country company through the intermediary of the financial institution and the financial institution was aware or should have been aware of this.

The reporting obligation by financial institutions can also be penalised with a fine of up to EUR 25,000 (Section 379 (2) and (4) AO new version).

Statute of limitations

For taxes on income or earnings in connection with relationships with a third-country company, the assessment period begins at the earliest at the end of the calendar year in which these relationships became known to the tax authorities, but at the latest 10 years after the end of the calendar year in which the tax arose (Section 170 (7) AO new version). This suspends the start of the assessment period for a maximum of 10 years.

Serious tax evasion

The measures are flanked by the inclusion of tax evasion using a covert third-country company in the catalogue of particularly serious tax evasion (Section 370 (3) sentence 2 no. 6 AO as amended). As a result, it will no longer be possible to make a voluntary disclosure in such cases and the limitation period for prosecution will be increased from five to ten years.

This article is part of a series. You can access the other parts here.

Markus Betz is a lawyer and tax consultant at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.