Tax Audits, Disputes and Tax Criminal Law

Tax disputes in Germany: how they arise

Tax disputes in Germany usually begin with a tax audit. German companies of medium and large size are audited regularly, large groups often continuously, and the audit findings lead to amended assessments that the taxpayer can challenge. The procedure is governed by the Fiscal Code (Abgabenordnung, AO) and, once the dispute goes to court, by the Finance Court Code (Finanzgerichtsordnung, FGO). Disputes pass through an administrative objection procedure before the tax office and then, if necessary, to a Finance Court and on appeal to the Federal Fiscal Court (Bundesfinanzhof, BFH) in Munich.

In parallel, tax matters can turn into criminal investigations when the authorities suspect tax evasion, which changes the rules of the game for the company and its managers.

This page explains the tax audit, the objection procedure, Finance Court and BFH proceedings, suspension of enforcement, limitation periods, the duty to correct tax returns, voluntary disclosure and tax criminal investigations, and the role of a tax compliance management system. It is written for heads of tax, CFOs, managing directors and general counsel. International issues such as transfer pricing adjustments and mutual agreement procedures are covered on our page on international tax.

Tax audits

A tax audit (Außenprüfung, often still called Betriebsprüfung) is announced by an audit order that defines the taxes and periods to be examined. The taxpayer must cooperate: provide documents and electronic data, give access to data processing systems, and name a contact person. Auditors increasingly use data analytics on the general ledger and sub-ledgers. Since recent reforms, audit orders often include a request for transfer pricing documentation, which must be submitted within 30 days, and auditors and taxpayers can agree on cooperation measures and timelines to accelerate the audit.

Audits end with a final meeting at which the findings are discussed, followed by a written audit report. Many disputes are resolved at this stage through a factual agreement (tatsächliche Verständigung) on questions of fact that are difficult to determine, such as valuations or estimates. Taxpayers should prepare carefully for the final meeting, quantify the effects of disputed findings and decide which issues to concede and which to pursue. Documents provided and statements made during the audit can be used later in court and, if an investigation is opened, in criminal proceedings.

Tax disputes before the tax office and the Finance Court

A taxpayer who disagrees with an assessment must file an objection (Einspruch) with the tax office within one month of notification of the assessment (§ 355(1) AO). The objection procedure is free of charge, and the tax office reviews the whole case, which means it can also change the assessment to the taxpayer's detriment after giving notice. Many tax disputes in Germany are settled in the objection procedure, for example after further documentation or a meeting with the responsible officials. Objections can also be suspended pending model cases before the BFH or the Federal Constitutional Court. The tax office's decision on the objection must give reasons, and the taxpayer can request access to the file to understand the basis of the assessment.

If the objection is rejected, the taxpayer can bring an action before the Finance Court within one month of notification of the objection decision (§ 47(1) FGO). Finance Courts are specialised courts at the level of the federal states, with professional and lay judges. Proceedings are written, with an oral hearing at the end, and the court investigates the facts of its own motion. Many cases settle after the court has indicated its view in a discussion hearing, often on the basis of a compromise on disputed facts.

Appeals to the BFH are possible only if the Finance Court or, on a complaint against non-admission, the BFH admits them because the case is of fundamental importance, the development of the law or uniformity of case law requires a decision, or there is a procedural error (§ 115(2) FGO).

Suspension of payment

Filing an objection does not suspend the obligation to pay the assessed tax (§ 361(1) AO). Taxpayers must apply separately for suspension of enforcement (Aussetzung der Vollziehung), first to the tax office and then, if refused, to the Finance Court (§ 69 FGO). Suspension is granted if there are serious doubts about the lawfulness of the assessment or if enforcement would cause undue hardship. Interest is charged on suspended amounts if the taxpayer ultimately loses, so the decision to apply for suspension is also a financing decision.

Binding rulings and early resolution

Many tax disputes in Germany can be avoided by seeking certainty in advance. A binding ruling (verbindliche Auskunft) from the tax office on the tax treatment of a planned transaction binds the authority if the facts are implemented as described; it is subject to a fee based on the value of the matter and is commonly used for reorganisations, transactions and complex financing structures. Wage tax rulings clarify the treatment of payments to employees, and advance pricing agreements resolve transfer pricing questions with foreign authorities. During audits, cooperation agreements and regular communication can narrow the issues before the final meeting.

VAT, customs and constitutional questions

VAT is a frequent subject of tax disputes in Germany, particularly regarding input VAT deductions, the place of supply of services, exemptions, invoicing requirements and fraud in supply chains, where taxpayers who knew or should have known of fraud lose their deduction.

Because VAT is harmonised EU law, Finance Courts refer questions to the Court of Justice of the European Union, and taxpayers can rely on the VAT Directive where German law is inconsistent with it. Customs and excise disputes are handled by the customs authorities and the Finance Courts. Where a taxpayer considers a tax provision unconstitutional, it can keep the case open pending decisions of the Federal Constitutional Court; tax offices often issue assessments provisionally on points that are already pending.

Correcting returns and voluntary disclosure

If a taxpayer realises after filing that a return was incorrect or incomplete and that this may lead to a tax shortfall, it must notify the tax office without delay and correct the return (§ 153(1) AO). The duty applies to the company and to its managing directors. A correction under § 153 AO is not a voluntary disclosure; it is appropriate where the original error was not intentional. If the error was intentional or reckless, a correction can nonetheless serve as a basis for avoiding criminal liability, but the requirements differ.

A voluntary disclosure (Selbstanzeige) under § 371 AO provides immunity from punishment for tax evasion if the taxpayer corrects all incorrect information for all tax evasion offences relating to a type of tax in full, at least for the last ten calendar years, and pays the evaded tax and interest. The disclosure is excluded once an audit order has been announced, criminal proceedings have been notified, an official has appeared for an audit, or the evasion has been discovered and the taxpayer knew or should have expected this.

Where the evaded amount exceeds EUR 25,000 per offence or a particularly serious case exists, immunity is not available, but prosecution is dropped if the taxpayer pays the tax, interest and an additional surcharge of 10%, 15% or 20% depending on the amount (§ 398a AO).

Because a partial or defective voluntary disclosure provides no protection, it must be prepared thoroughly, often with forensic accountants, and filed for all persons involved. Companies should consider the corporate fine risk under §§ 30 and 130 of the Administrative Offences Act at the same time; see white-collar crime and corporate defence.

Tax criminal investigations

Tax evasion (§ 370 AO) is punishable by imprisonment of up to five years or a fine, and in particularly serious cases, for example where taxes of a large amount are evaded, by imprisonment of six months to ten years.

Investigations are conducted by the tax investigation units and the criminal tax divisions of the tax offices, which have the powers of a public prosecutor in tax cases, or by the public prosecutor. Searches of business premises and homes, seizure of documents and data, and interviews with employees are common. The limitation period for prosecution of particularly serious cases is 15 years (§ 376(1) AO), and the assessment period for evaded tax is extended to ten years (§ 169(2) AO).

For companies, the main risks are liability for the evaded taxes, interest, corporate fines and confiscation of proceeds, as well as reputational damage and exclusion from public contracts. Managing directors face personal criminal liability and liability for taxes under §§ 69 and 71 AO. Employees who participated, and advisers who assisted, can also be prosecuted. A coordinated defence strategy for the company and the individuals, with separate counsel where interests conflict, is essential. Our page on internal investigations explains how companies investigate allegations internally.

Searches and first steps

A search by tax investigators is often the first sign of a criminal tax case. Companies should have a dawn raid protocol: reception staff call a designated contact and external counsel, investigators are asked to wait a short time for counsel to arrive, the search order is checked for its scope, copies of seized documents and data are requested, and employees are informed of their rights, including the right to remain silent if they could incriminate themselves. Statements given in the confusion of a search are a frequent source of later problems. After the search, the company should secure an inventory of what was taken, assess the allegations and decide quickly whether a cooperative approach, including a possible correction of returns, is appropriate.

The company's response must also consider employment law, data protection, ad hoc disclosure duties for listed companies and communication with banks, auditors and insurers. D&O and criminal defence insurance policies may cover the costs of individual defence counsel, but must be notified in time.

Tax compliance management systems

A tax compliance management system (tax CMS) is a set of processes and controls designed to ensure that tax obligations are met completely and on time. German law does not expressly require a tax CMS, but the tax authorities have indicated that the existence of an appropriate internal control system for tax matters can be an indication against intent or recklessness when errors are discovered. Auditing standards provide a framework for assessing such systems. For companies, a tax CMS reduces the risk of errors, helps to distinguish a simple correction under § 153 AO from a voluntary disclosure situation, and protects managing directors.

• Define tax responsibilities and reporting lines, including for subsidiaries.
• Document processes and controls for VAT, wage tax, withholding taxes and transfer pricing.
• Set up a procedure for handling detected errors under § 153 AO.
• Train employees in tax-relevant functions and review the system regularly.

Interest is a further factor in any dispute: additional tax resulting from an audit bears interest for the period after the tax would have been due, and so do suspended amounts if the taxpayer loses. Conversely, refunds bear interest in the taxpayer's favour. The cost of interest should be included when deciding whether to pay disputed tax and claim it back or to apply for suspension.

A tax CMS also improves the outcome of tax disputes in Germany, because well-documented processes make it easier to explain positions to auditors and courts. It should be integrated into the company's general compliance management system; see compliance management systems.

How TRW & Co helps

We advise companies and individuals on tax disputes in Germany, working with their tax advisers. We support clients during tax audits, prepare final meetings and factual agreements, file objections and represent clients before the Finance Courts and the BFH. We apply for suspension of enforcement, advise on corrections under § 153 AO and prepare voluntary disclosures, and we defend companies and managers in tax criminal investigations, including searches. We also help companies design and review tax compliance management systems. To discuss a tax dispute, please contact us as early as possible.