Voluntary Disclosure for Tax Evasion in Germany

In our experience, tax errors occur very frequently, especially in an international context. Many of these errors are not immediately apparent to the taxpayer. In such cases, a voluntary disclosure can help to correct omissions and avoid criminal consequences.

Typical scenarios include, for example:

Undeclared foreign assets and income

Interest, dividends, or capital gains from foreign securities accounts are not always automatically reported to the German tax authorities. Anyone who does not declare this income in their tax return is quickly acting in breach of their obligations. Inflows from foreign trusts or U.S. LLCs whose tax classification as a partnership or corporation is unclear may also be taxable in Germany, even if the taxpayer assumed that taxes would only be triggered in the U.S. The same applies to investments in foreign funds whose tax treatment under German law is unclear. Another classic example is the free use of a vacation property in Spain that belongs to a Spanish corporation. In such cases, the tax authorities assume that there has been a hidden distribution of profits to the shareholder, which would have been taxable. Foreign investments whose income would have been taxable for the German shareholder despite the lack of distributions to the latter (CFC taxation) are also very common. Additional taxation can also affect beneficiaries of foreign foundations, for example.

Such circumstances should always be carefully reviewed for their tax consequences in Germany.

Obligation to report foreign investments pursuant to Section 138 of the German Tax Code (AO)

Anyone who invests in a foreign company must report this to the tax office. This obligation is often overlooked, especially in the case of investments via foreign holding structures or family offices. Anyone who holds foreign investments should have their investment structure analyzed. In some cases, a subsequent notification may be required.

German permanent establishments or permanent representatives in Germany for foreign companies

If a foreign company employs staff in Germany (including freelancers) or uses business premises here, this may lead to the establishment of a permanent establishment (Section 12 AO) or a permanent representative (Section 13 AO). In such cases, the income generated in Germany is taxable – even if the company is based abroad. A permanent establishment in Germany is also always established if the management operates from Germany, i.e., if management decisions are made in Germany.

Incidentally, sales tax may also be payable in such cases, e.g., if the foreign company is purely a letterbox company and the business is actually operated from Germany.

In the worst case scenario, the foreign corporation becomes subject to unlimited tax liability in Germany on its worldwide income due to its management in Germany. This often happens when German taxpayers believe that they can avoid German tax liability by setting up a foreign company, but do not move abroad themselves and instead manage the foreign company's business from here.

Taxation on deemed disposal of assets when moving abroad

When moving away from Germany, so-called exit taxation may apply, especially if the taxpayer has a stake in a corporation (e.g., GmbH). However, stakes in foreign corporations also trigger exit taxation – a fact that is often overlooked. The aim of the tax authorities is always to tax so-called “hidden reserves” before they are removed from German taxation law.

Even those who do not hold shares in a corporation but are active as sole traders are not safe from taxation in the event of their departure. In this case, we refer to “taxation on deemed disposal of assets.” Anyone who moves away without first considering the tax implications will find it almost impossible to correct this retrospectively for tax purposes.

We would be happy to check whether a disjunction exists or whether there is a risk of exit tax and whether a voluntary disclosure or subsequent declaration is necessary. We also advise on possible arrangements to reduce the tax burden or avoid taxation.

Hidden profit distributions and transfer pricing in international structures

Cross-border payments between affiliated companies – for example, between a foreign holding company and a German subsidiary – can result in hidden profit distributions if arm's length conditions have not been agreed upon. These are relevant for tax purposes and must be declared correctly. Closely related to this are violations of transfer pricing regulations. Although the violations primarily affect the company concerned, the managing director is also liable for tax errors under Sections 34 and 69 AO. Contractual agreements and payments based on contracts between related companies in Germany and abroad should therefore always be checked in advance to ensure that they are appropriate.

Moving to Germany: Lack of knowledge about German tax obligations

People who move to Germany from abroad are often surprised to learn that their worldwide income and assets may be taxable here. Expats, entrepreneurs, and wealthy individuals with international investments are particularly affected. Cases involving the management of foreign companies from Germany are often problematic, for example. The fact that completely different allowances may apply abroad than in Germany is also often overlooked – for example, the allowances for gifts between spouses in the U.S. are much higher than the allowance of only EUR 500,000 (every 10 years) in Germany. In some states in the U.S., the so-called Community Property Law also applies, meaning that assets are always acquired jointly by both spouses during the marriage – this is different in Germany. If the wealthier spouse transfers half of the newly acquired, rented apartment building to the other partner, this constitutes a gift, which the donor may not even consider because they are used to a completely different situation in their home country.

Inheritances and gifts with foreign connections

Gifts and inheritances from abroad or to foreign countries are often a source of uncertainty. Many foreigners are surprised to learn that, for example, a gift or inheritance to Germany may be subject to German tax, because in some countries the only thing that matters is where the donor or testator is resident. Under German law, however, it is sufficient if the recipient of the gift or the heir also lives in Germany. In some cases, the double taxation agreements concluded by Germany can help, but in many cases they do not.

Inheritance tax abroad and extended limited tax liability

The long arm of the German tax office also comes as a surprise to some expatriates. Anyone who has not lived abroad for 5 years is still liable for inheritance and gift tax in Germany, for example. And above all, moving to low-tax countries with which Germany has not concluded a DTA may also be subject to 10 years of extended limited tax liability on income. In other words, moving abroad is easier said than done in terms of tax implications.

Tax reporting obligations also apply within the family. Anyone who gifts larger assets – such as real estate, company shares, or cash – must report this to the tax office. Failure to report this may result in gift tax evasion. Caution is also advised with loans: if, for example, the interest rate is not in line with market conditions, i.e., if it is too low, the difference between this and a market-rate interest rate constitutes a gift. For gifts to persons subject to tax class 2 (e.g., gifts to parents, siblings, ex-spouses, etc.), only an allowance of EUR 20,000 applies over a 10-year period – this allowance is quickly exhausted and exceeded.

Joint accounts and deposits held by spouses are also a typical tax trap. If only one partner finances the joint account but the other makes use of it, this may also constitute a gift. In any case, it is safer to keep separate accounts and deposits.