With the voluntary self-disclosure to avoid penalty, Germany has created a unique legal construct for a return to tax honesty. Relevant persons may obtain exemption from punishment if they meet certain conditions and “make a clean sweep” with the fiscal authorities.
What is tax evasion?
Evading taxes constitutes a criminal offense in Germany. A German tax resident is already evading taxes if he does not disclose in his tax return capital gains from a foreign account/deposit. If an investor files incomplete tax returns for several years, he renders himself liable to prosecution due to tax evasion for every single year. A tax evasion may already exist if the bank paid withholding taxes to the German tax authorities.
What are the penalties for tax evasion?
Tax evasion involves a fine or imprisonment of up to five years. For particularly serious cases, German law provides for imprisonment of six months up to ten years. An evasion of more than € 100,000 within one year is regarded as particularly serious. In individual cases, the evasion of € 50,000 may be sufficient if the tax authorities pay out money.
Voluntary self-disclosure as “bridge to tax honesty”
A self-disclosure exempts from punishment and thus paves the way to tax honesty. In general, the following applies: if the investor subsequently declares the formerly non-disclosed income in full, he is exempt from punishment. With the Law on the Amendment of the German Fiscal Code and the Introductory Act to the Fiscal Code of December 22, 2014, the conditions for the filing of voluntary self-disclosures have largely been tightened with effect from January 1, 2015. However, the amendment also included partial relieves with particular importance for companies.
As of January 1, 2015, an exemption from punishment can only be obtained if the taxpayer
- Files the voluntary disclosure in due time,
- subsequently declares his entire income in full, and
- pays the taxes and – pursuant to the new legal situation – also the related interest.
1. Filing in due time
There is no exemption from punishment if, prior to the receipt of the voluntary disclosure,
- the tax office had ordered an audit of the relevant tax type (e.g., income tax),
- the initiation of investigation proceedings had been announced,
- a tax official appeared for a tax audit or for tax offence investigations,
- an official of the fiscal authority appeared for an unannounced VAT or wage tax audit visit,
- or if the offense had already been detected and the investor was aware of such detection or had to expect such detection.
2. Complete information
With the new regulation as of January 1, 2015, the requirements for a complete voluntary self-disclosure increased compared to the previous legal situation until December 31, 2014. In accordance with such regulation, an effective voluntary self-disclosure requires complete and detailed information
- on all non-time-barred (from a criminal perspective) tax offences regarding the relevant tax type,
- however, at least on all tax offenses regarding the relevant tax type within the last ten calendar years.
It is important to declare all formerly non-disclosed income. An exemption from penalty will be established only once and only if all income from every source will be subsequently declared. The investor has to “make a clean sweep”, as such entirely returning to tax honesty. If no exact figures are available or in urgent cases it is recommendable to estimate the undisclosed income and add a safety margin.
3. Timely payment of taxes
In order to obtain an exemption from punishment, the investor has to pay the additional taxes and, pursuant to the new legal situation, also interest on the evaded amount in due time. If the evaded amount during the relevant year exceeds € 25,000, there is an additional surcharge for such year. Within the scope of the new regulation, the formerly uniform penal surcharge of 5% has been replaced by graded surcharges:
- 10% for evaded amounts up to € 100,000
- 15% for evaded amounts of more than € 100,000 up to € 1 million
- 20% for evaded amounts of more than € 1 million
The payment period is determined by the tax office. As such period might be rather short, one should ensure to have enough funds for the payment of the taxes, interest and the surcharge, if applicable, even before filing the voluntary self-disclosure.
Consequences of an effective voluntary self-disclosure
In case of an effective voluntary self-disclosure
- the foreign assets become official (which might be of interest in particular in case of an upcoming assignment), and
- the investor is exempt from punishment, i.e., he must not fear a criminal conviction.
How do we support voluntary self-disclosures?
In connection with the filing of a voluntary self-disclosure and/or criminal tax proceedings we provide comprehensive and practice-oriented advice. Our services start with an extensive consultation, in the course of which we analyze the investor’s individual situation.
- Determination of relevant periods,
- particularities in case of succession cases or gifts,
- participation of additional persons.
Subsequently, we contact the foreign bank and request the documents required for a voluntary self-disclosure. On the basis of such documents we determine the amount of income which has to be subsequently disclosed as well as the expected tax back payments (incl. interest). If applicable, we coordinate the voluntary self-disclosure with additionally concerned people. Subsequent to the self-disclosure’s filing we adopt the entire correspondence with the tax offices and review the tax returns which have been amended due to the self-disclosure.