Finance Court Proceedings and Appeals to the BFH

Finance court proceedings in Germany: the route to the BFH

Finance court proceedings are the judicial route for challenging tax assessments and other decisions of the German tax authorities. Before going to court, the taxpayer must generally file an objection (Einspruch) with the tax office within one month of notification (§ 355(1) of the Fiscal Code, AO). If the objection is rejected in whole or in part, an action can be brought before the competent Finance Court (Finanzgericht) within one month (§ 47(1) of the Code of Procedure for Finance Courts, FGO).

The Finance Court is the only fact-finding instance. Its judgment can be appealed on points of law to the Federal Fiscal Court (Bundesfinanzhof, BFH) in Munich only if the appeal is admitted, either by the Finance Court or by the BFH following a complaint against non-admission (§§ 115, 116 FGO).

Because there is only one fact-finding instance and access to the BFH is restricted, finance court proceedings require careful preparation from the objection stage onwards. Facts and evidence that are not presented in time can be excluded, and procedural errors cannot always be corrected later. At the same time, the procedure offers useful tools, including interim relief against enforcement of a contested assessment and the possibility of settling disputes in court.

The objection procedure

The objection is a free-of-charge administrative review by the tax office that issued the assessment. It must be filed in writing or electronically within one month of notification of the decision. The tax office reviews the case in full and may also change the assessment to the taxpayer's disadvantage, but only after warning the taxpayer and giving it the opportunity to withdraw the objection. The tax office can set deadlines for the taxpayer to state the facts, explain specific points or present evidence, and facts presented after such a deadline can be disregarded (§ 364b AO).

The objection procedure often resolves disputes, particularly where the issue is factual and the taxpayer can provide further evidence. Objection decisions are prepared by a separate unit of the tax office, which brings a second look at the case, and a meeting with the official in charge can clarify open points quickly. It is also the stage at which a suspension of enforcement (Aussetzung der Vollziehung) should be requested, because filing an objection does not by itself suspend payment of the contested tax. Where many taxpayers are affected by the same legal question pending before the BFH or the Federal Constitutional Court, the tax office may suspend the objection procedure until the decision.

Proceedings before the Finance Court

Germany has eighteen Finance Courts, generally one per federal state, with several courts in the largest states. They decide in senates of three professional and two honorary judges, or by a single judge if the case is transferred because it presents no particular difficulties and has no fundamental significance (§ 6 FGO). Taxpayers may conduct proceedings themselves before the Finance Court, or be represented by lawyers, tax advisers, auditors and certain other professionals (§ 62 FGO).

The action must identify the claimant, the defendant tax office and the subject of the dispute, and should state the facts and evidence. The court investigates the facts of its own motion but relies heavily on the parties' cooperation, and it can set deadlines with the effect that late submissions are excluded (§ 79b FGO). Most cases are decided after an oral hearing, which is public. In practice, many cases end with a settlement: the court indicates its preliminary view, and the tax office issues an amended assessment while the taxpayer declares the dispute settled.

In certain cases, the taxpayer can bring an action without completing the objection procedure, for example with the tax office's consent as a direct action, or where the tax office has not decided on an objection within a reasonable time, usually six months, as an action for failure to act.

Interim relief: suspension of enforcement

Neither an objection nor an action suspends the obligation to pay the contested tax (§ 69(1) FGO). The tax office can, and on application should, suspend enforcement if there are serious doubts about the lawfulness of the assessment or if enforcement would cause undue hardship not justified by overriding public interests (§ 69(2) FGO; § 361 AO). Suspension can be made dependent on security. If the tax office refuses, the taxpayer can apply to the Finance Court for suspension.

Suspension has a cost: if the taxpayer ultimately loses, interest at 0.5% per month is charged on the suspended amount. Taxpayers should therefore weigh the liquidity benefit against the interest risk and the strength of their case. For large amounts and uncertain outcomes, paying the tax and claiming a refund with interest if successful can be the better option.

Appeals to the Federal Fiscal Court

An appeal on points of law (Revision) to the BFH is admissible only if it has been admitted. Under § 115(2) FGO, the appeal must be admitted if the case is of fundamental significance, if the development of the law or the uniformity of case law requires a BFH decision, or if a procedural defect is asserted and exists on which the decision may be based. If the Finance Court does not admit the appeal, the losing party can file a complaint against non-admission with the BFH within one month of service of the full judgment and must substantiate it within two months, setting out the grounds for admission (§ 116 FGO).

Once admitted, the appeal must be filed within one month and substantiated within two months of service of the full judgment, or within one month of the admission decision where the BFH has admitted it on a complaint (§ 120 FGO). The BFH reviews only legal questions and is bound by the Finance Court's findings of fact unless procedural complaints succeed. Representation by a lawyer, tax adviser, auditor or authorised firm is mandatory before the BFH (§ 62(4) FGO).

The BFH can decide the case itself, refer it back to the Finance Court for further findings, or refer questions of EU law to the Court of Justice of the European Union and questions of constitutionality to the Federal Constitutional Court. Its judgments are published and shape administrative practice, although the Federal Ministry of Finance decides whether a judgment is applied generally beyond the individual case.

Evidence and procedure in finance court proceedings

The burden of proof in finance court proceedings follows the general rule that each party bears the burden for the facts favourable to it: the tax office for facts increasing the tax, the taxpayer for facts reducing it, such as deductions, exemptions and reliefs. In cross-border cases, the taxpayer has enhanced duties to cooperate and to provide evidence from abroad, and the court can draw negative conclusions if documents are not produced. Witnesses, expert opinions and documents are the main means of evidence; the court can hear witnesses at the hearing or ask for written statements.

Documents in foreign languages must generally be translated. Where valuations are disputed, as in inheritance tax or transfer pricing cases, court-appointed experts can play a decisive role, and the parties should prepare their own expert evidence early. Confidential business information can be protected to a degree, but the court and the tax office have access to the file.

Finance court proceedings are increasingly conducted electronically. Lawyers and tax advisers must file documents through the secure electronic channels, and hearings by video conference are possible with the court's consent. The court files are kept electronically in many states, and inspection of the file is granted on request.

Strategy and costs

Finance court proceedings take time. Depending on the court, first-instance proceedings can take one to two years or more, and BFH proceedings a further one to two years. Court fees are based on the amount in dispute, and the losing party bears the costs, including the other side's statutory fees; the tax office's own costs are not reimbursed. Settlement opportunities exist at every stage, and courts often encourage agreement in hearings.

For businesses, the decision to litigate should consider the amount at stake, the importance of the legal question for future years, the risk of interest, the effect on relationships with the tax office and the potential for a factual agreement. Test cases on questions affecting many taxpayers can be pursued strategically, while other taxpayers keep their own assessments open by objection. Our article on handling a German tax audit explains how many disputes arise, and our tax disputes page outlines our litigation work.

Illustration: after a tax audit, a GmbH receives assessments treating management fees paid to its foreign parent as hidden profit distributions. It files objections and applies for suspension of enforcement, which the tax office grants against security. The objection is rejected, and the company brings an action before the Finance Court, presenting service agreements and witnesses. The court indicates that part of the fees is justified, and the parties settle. Had the court decided against the company, the question of how the arm's length principle applies to such fees might have justified an application for admission of an appeal to the BFH.

How TRW & Co helps with finance court proceedings

We represent companies and private clients in objection procedures, finance court proceedings and appeals to the Federal Fiscal Court, as well as in references to the Court of Justice of the European Union. We prepare evidence from the audit stage onwards, apply for suspension of enforcement, conduct hearings and negotiate settlements, and assess the prospects of complaints against non-admission and appeals. Where tax disputes overlap with criminal proceedings or international double taxation, we coordinate with our colleagues in white-collar defence and international tax. To discuss a dispute, contact us. This article provides general information and is not tax or legal advice.