Germany Combats Use of Letterbox Companies to Avoid Tax

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By Jabeen Bhatti

The German upper house of Parliament, the Bundesrat, passed a bill June 2 to stymie tax evasion through letterbox companies as part of a wider crackdown on illegal tax practices in light of last year’s Panama Papers scandal.

The bill, which will become law after being signed by the German president, will require German taxpayers to disclose their relationships to letterbox companies and similar entities that are located outside the European Union and the European Free Trade Association.

Under the new provisions, taxpayers are also required to disclose new shareholdings acquired in these entities if they exceed 10 percent.

Furthermore, the bill introduces a reporting obligation for banks and financial institutions to disclose to tax authorities if they assisted a taxpayer in acquiring direct holdings in a letterbox company of over 30 percent. That means financial institutions will have to cooperate more closely with tax authorities in investigations of tax evasion.

Taxpayers and financial institutions that fail to comply with these disclosure obligations could be fined up to 25,000 euros ($22,162).

The lower house of the German parliament, the Bundestag, approved the bill April 27. It would apply to new shareholdings created from Jan. 1, 2018, onward.

Critics: Bill Weak

The bill’s critics say its deficiencies could prevent it from having much of an impact due to its low reporting standards for taxpayers and banks, and also because its reporting obligations apply only to banks and taxpayers, not law firms or other service providers who help taxpayers establish shell companies that fall outside the scope of the law.

Lawmakers from the opposition Green Party, meanwhile, had previously criticized the bill as “half-hearted,” as its reporting requirements would apply only to letterbox companies outside the European Union.

EU countries such as Malta, Cyprus, or even Switzerland—which is not part of the bloc—which have had problems with letterbox firms in the past, would be unaffected, said Green lawmaker Lisa Paus during the bill’s reading in parliament April 27.

“As long as there are these simple escape routes, this law only threatens to shift the headquarters and distribution channels of German taxpayers’ letterbox companies instead of finally drying up the tax swamp,” said Paus.

Awaiting Guidelines

Germany’s Ministry of Finance will eventually release guidelines on how the law should be implemented, attorneys told Bloomberg BNA.

But until the BMF does so, practitioners are faced with a number of questions as to how to interpret provisions in this law on a practical basis.

“Obviously we do need clarity,” Oliver von Schweinitz, a tax attorney with law firm GGV in Hamburg, told Bloomberg BNA June 1. “The whole area has become convoluted and terribly complex.”

Others said such guidance is critical.

“We won’t know clearly how to deal with these questions until the federal finance ministry issues its letter,” Nikolay Herber, a tax attorney at Noerr in Munich, told Bloomberg BNA May 31.

“The biggest issue for advisers will be to deal with this new legislation in a way that the tax office’s letter won’t get clients into trouble later on,” he added.

The Ministry of Finance has not yet scheduled a date for the guidelines to be released.

To contact the reporter on this story: Jabeen Bhatti in Berlin at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

The bill, in German, is at http://src.bna.com/psK.

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