Corporate Tax Evasion Defence Lawyers in Germany

Checklist by German Criminal Defence Solicitors specialising in Corporate Tax Evasion Charges

This article provides a summary of possible civil and criminal law consequences of unpaid business taxes under German law 

Unpaid German corporate taxes lead to personal liability and criminal charges

In many situations, board members and managing directors are personally and fully liable with their private assets for the company’s tax liabilities in Germany. Although German limited companies, such as the GmbH or the AG, are in principle liable only with the company’s assets, tax law overrides this protection to safeguard the tax authorities’ interests. The tax office recovers these amounts directly from the responsible individuals by means of a liability notice. In addition to the personal financial liability, tax debts almost always lead to criminal investigations by German criminal prosecutors.

Personal financial liability of directors and board members of German businesses

The personal liability of executives with their private assets derives primarily from Section 69 of the German Fiscal Code (AO) and Section 34 AO. The legal representatives of a company in Germany must ensure that all business related taxes are paid in full and on time.
What exactly triggers personal liability of company management?
For the tax office to be permitted to seize the private assets of a managing director or board member, four criteria must be met simultaneously:
  • Breach of duty: Tax returns were either not submitted at all, submitted incorrectly or late, or taxes due were not paid.
  • Fault: The breach of duty occurred intentionally or through gross negligence. Mere ignorance or simply delegating the matter to a tax adviser without supervision does not protect against a charge of gross negligence.
  • Causality: The tax shortfall must be directly attributable to the misconduct of the management.
  • Uncollectibility: The tax office can no longer recover the tax debts from the company itself (e.g. due to lack of assets or insolvency).
Which taxes does this personal liability apply to?
The liability covers the entire range of business-related taxes:
  • Value Added Tax (Umsatzsteuer)
  • Corporation Tax (Körperschaftsteuer)
  • Trade Tax (Gewerbesteuer)
  • Late payment fines and interest (Verspätungszuschlag, Verzugszinsen)
The special status of payroll tax (Lohnsteuer)
The biggest risk of all is unpaid payroll tax. Whilst the so called principle of pro rata repayment applies to general tax liabilities during a crisis (the tax office must not be placed in a worse position than other creditors), payroll tax is subject to an absolute priority obligation. When net wages are paid to employees, the corresponding payroll tax must be remitted in full (100 per cent) to the tax office. If this does not happen, personal liability almost always applies immediately and without any leeway in the calculation.

Criminal charges against directors and board members of German businesses

The civil law risk of being held liable with one’s private assets almost always translates into a criminal law risk in the event of a corporate crisis or accounting errors. As soon as a company fails to pay taxes or duties, or faces the threat of insolvency, the public prosecutor’s office, the tax investigation department or customs authorities routinely intervene.
In the following scenarios, managing directors and board members face the risk of personal criminal investigations:
Failure to pay social security contributions (Section 266a of the German Criminal Code (StGB))
In practice, this is the most common reason for criminal investigations during a crisis.
  • The scenario: Money is tight, and the managing director decides to pay employees their net wages but withholds the employees’ share of social security contributions in order to pay suppliers.
  • Criminal liability: Under Section 266a(1) of the German Criminal Code (StGB), the mere failure to pay the employees’ share of social security contributions is a criminal offence – entirely regardless of whether the net wages were paid out or whether the company is insolvent. The offence carries a prison sentence of up to 5 years.
  • The scenario: In order to conserve liquidity or buy time, the management submits incomplete or falsified VAT or payroll tax returns. Even the deliberate concealment of tax-relevant facts (e.g. simply failing to submit due tax returns in the event of insolvency) is sufficient.
  • Criminal liability: Anyone who provides false information to the tax office and thereby evades tax is liable to prosecution for tax evasion under § 370 AO. The penalties range from a fine to up to 5 years’ imprisonment; in serious cases (e.g. where the amount evaded is 50,000 euros or more), the sentence may be up to 10 years’ imprisonment.
Delay in filing for insolvency (§ 15a InsO)
This offence is directly linked to tax liabilities, as the tax office is often the creditor that files the application for insolvency.
  • The scenario: The company is already insolvent or over-indebted (often recognisable by huge tax arrears), but the managing director waits and hopes for an improvement in the situation.
  • Criminal liability: Under § 15a(4) InsO, an application for insolvency must be filed no later than three weeks after the company becomes insolvent (or six weeks in the case of over-indebtedness). If this deadline is culpably missed, the penalty is up to 3 years’ imprisonment. Important in practice: Every insolvency file is automatically forwarded by the insolvency court to the public prosecutor’s office for examination regarding delayed filing of an insolvency petition.
Bankruptcy and preferential treatment of creditors (Section 283, Section 283c of the German Criminal Code (StGB))
  • The scenario: With insolvency looming, the management sets aside assets (e.g. selling company cars to relatives at a reduced price) or pays off individual, favoured creditors (e.g. the main supplier who is a friend), whilst the tax office and others are left empty-handed.
  • Criminal liability: This constitutes the offences of bankruptcy (§ 283 StGB) or preferential treatment of creditors (§ 283c StGB).
Bogus self-employment and undeclared work (Section 266a of the German Criminal Code (StGB) / Undeclared Work Act (SchwarzArbG))
  • The scenario: The company employs ‘freelancers’ (subcontractors) who, in reality, are integrated into the business and bound by instructions just like permanent employees, in order to save on income tax and social security contributions.
  • Criminal liability: If such bogus self-employment is uncovered during a tax audit or customs inspection (FKS), this immediately leads to combined criminal investigations into the withholding of wages (Section 266a StGB) and tax evasion (Section 370 AO) for previous years.
VAT carousels and tax evasion (Section 71 of the German Fiscal Code)
A genuine, criminally relevant special case arises where the managing director actively participates in tax evasion (e.g. VAT carousels). If input tax refunds are knowingly and wrongfully claimed or turnover is concealed, the management is immediately and fully liable with their private assets under § 71 AO (liability of the tax evader). In such cases, there is no calculation of liability ratios or mitigation due to a crisis.

The Expert on British-German Legal Matters

German business litigation lawyer Bernhard Schmeilzl specialises in UK-German legal matters since 2001. He is not only a very experienced German trial lawyer but he also knows the English side of things. He is the author of the only German language textbook on civil litigation in England and Wales (“Der Zivilprozess in England”) published by the renowned BECK Verlag.

He is the editor of the German language law blog www.EnglischesRecht.de, which explains matters of English law to a German speaking audience.  His in depth knowledge of both legal systems and his 25+ years experience in German and UK courtrooms make him a highly valued advisor and legal counsel in cross border cases. 

Header image licensed from Magnific.com

Tags: