Germany Prepares Crackdown on Letterboxes

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By Jabeen Bhatti

Nov. 15 — The German Cabinet is preparing to address a bill Dec. 21 to combat tax evasion by cracking down on letterbox companies and banking secrecy as a response to the Panama Papers and other scandals involving sophisticated forms of tax planning.

The bill, prepared by the Federal Ministry of Finance (BMF) under Finance Minister Wolfgang Schauble, aims to “make it more difficult for domestic taxpayers to evade taxes by means of domicile companies—often called letterbox companies,” the BMF said.

The bill should also have a “preventative effect” thanks to a higher risk of getting caught, the ministry added in a Nov. 1 statement on the bill.

To achieve this, the bill’s core point is the creation of transparency on “controlling” business relationships of German taxpayers to like partnerships, entities, associations of individuals or collections of assets based or managed in so-called “third countries” outside the EU or the European Free Trade Association (EFTA), according to the BMF.

If approved by the cabinet, the bill will be submitted to both houses of the German parliament for debate and further approval.

The Bundestag, the lower house of the German parliament, is currently scheduled to address the bill for a first reading on Jan. 26, 2017, according to a spokesperson from the BMF.

‘Outcome’ of Panama Papers

In June, attorneys told Bloomberg BNA that the German government’s proposed changes to the country’s tax code were a direct outcome of the Panama Papers and part of a wider set of measures to fight tax avoidance along with the Organization for Economic Cooperation and Development’s base erosion and profit shifting program and proposed changes to the EU’s Anti-Tax Avoidance Directive.

The BMF’s bill complements these measures by targeting private individuals via a range of changes to the German tax code, said attorneys, whereas before, the focus had been on the corporate side.

While the bill is still in its early stages, attorneys said its chances of becoming law are high given the strong political will in Germany to look tough on tax evasion.

“We have elections coming in Germany next year,” Oliver von Schweinitz, a tax partner at GGV in Frankfurt, told Bloomberg BNA in a Nov. 10 interview.

“Here, too, there is a lot of skepticism against globalization and tax planning, so I would think this bill has a very good chance of seeing the light.”

The BMF’s measures are partly intended to drive home the point that Germany will not tolerate these tax avoidance schemes.

“Banks should have understood the message with the Panama scandal as such,” said Von Schweinitz.

“I think this will have the effect of restricting at least private wealth operations from opening that kind of service,” said Von Schweinitz. “And for banks that insisted on keeping that foreign offshore hosting capability, they need to basically stop it.”

Removal Of Banking Secrecy

Among the provisions of the BMF’s bill is the removal of tax-related banking secrecy provisions under section 30a of the German Fiscal Code.

“This will have a major impact on the relationship between a client and his bank,” said Von Schweinitz.

“Traditionally, what happens is that when a bank becomes subject to audits, it is the bank that is subject to the audit, not the bank’s clients,” he added. “If banks have done everything correctly, they don’t need to say who their clients are.”

But with the provisions on banking secrecy removed, tax examiners may be allowed to note during an audit what kind of assets clients possess and then further investigate where that money comes from, Von Schweinitz said.

“If Section 30A of banking secrecy is gone, then tax authorities may well have full access to the bank’s data—banks will have to be much more transparent on who their customers are,” he added. “That is something the tax authorities have been fighting a long time for.”

Attorneys are critical that this provision on banking secrecy would be stricken.

“I think it’s a bit extreme,” said Von Schweinitz. “Banking secrecy had its usefulness, not just to tax evaders, but to normal banks trying to protect the privileged relationship with their client.”

The bill also would require credit institutions to collect and record tax identification information of domestic account holders and all beneficial owners of companies and partnerships, and release that information to tax authorities during an automated account screening procedure under Section 24a of the German Banking Act.

That is a departure from the traditional practice of not collecting an individual’s tax identification number when an account is opened. Still, under common reporting standards, however, banks already record the tax identification numbers of foreign account-holders during this process.

“So this practice isn’t so new—it’s basically being extended now to German tax identification numbers,” added Von Schweinitz.

Von Schweinitz said that Germany is already a front runner when it comes to automated account checking procedures. Having access to an easily verifiable tax ID number during an automated account check will make it easier for tax authorities to carry out these examinations, he said, adding that while not a major change for banks, this adjustment will still prove costly.

“It entails IT adaptations, and for a large bank, every minor change to their account opening forms and data fields would cost more than 1 million euros,” he said.

Third-Country Relations Targeted

Financial institutions, meanwhile, would be required to inform tax authorities of any relations they create or mediate for taxpayers to so-called “third countries,” meaning non-EU or non-EFTA countries, including the US, under certain conditions, said the BMF in its legislative draft.

Financial institutions would be held responsible for any tax losses resulting from a failure to release this information and be liable for a fine up to 50,000 euros.

“Basically, financial institutions would need to inform tax authorities when they have assisted in the acquisition of at least 30 percent of a foreign non-German corporation or partnership,” said Von Schweinitz.

“It makes sense in the private wealth arena for a bank to be subject to some reporting duties if they help people acquire and hold offshore vehicles in the Cayman Islands or Panama,” he added. “That product is then basically over.”

But attorneys caution that the wording currently used in the bill is generic and could affect other relationships.

“This could also apply to corporate finance or investment banking relationships,” said Von Schweinitz. “It isn’t targeted exclusively to low-tax jurisdictions—nor does it apply only to private wealth—at the moment.”

As a result, corporate transactions that pose no danger of tax evasion could unnecessarily come under scrutiny, added Von Schweinitz.

This reporting on third country participations would also create a lot of administrative work for banks, said attorneys.

“I assume the reporting file would be yet again another XML file, so technically a bank would need to run a project in order to be able to do this reporting,” said Von Schweinitz.

As a result, compliance for corporate finance transactions could become overly burdensome for some banks, he added.

Taxpayers, for their part, would have to declare their business relations to directly or indirectly held partnerships, corporations, associations or assets in third countries, regardless of whether they are formally involved in the holding or not.

The bill also increases the maximum penalty for a failure to fulfill this disclosure obligation, to 25,000 euros.

Tax Evasion a ‘Severe’ Act

Among the bill’s other provisions is the reclassification of tax evasion via concealed relations with third-countries controlled by taxpayers as a “particularly severe acts of tax evasion” with prison sentences generally of at least six months, irrespective of amount, and a 10-year statute of limitation for prosecution, said the BMF.

Other points in the finance ministry’s bill include the standardization of existing disclosure obligations for acquiring qualified participations in foreign companies for direct and indirect holdings.

At the same time, deadlines for the reimbursement of the notification should be extended until income or corporate tax declarations are submitted in order to provide some relief to taxpayers and financial authorities, added the BMF in its statement.

Automated account screening procedures for tax purposes would also be extended under the bill to enable tax authorities to determine instances where German taxpayers are entitled to dispositions or deposits from natural persons or companies and require credit institutions to maintain data for up to 10 years after an account is closed.

The bill also says that possibilities for “information collection requests” from tax authorities should be clarified by the Federal Finance Court (BFH) on the basis of existing case law, and adds new safe-keeping obligations for taxpayers that have a controlling or determining influence in third-countries.

External audits with these taxpayers would then be possible in the future without a specific justification, added the BMF.

To contact the reporter on this story: Jabeen Bhatti in Berlin at

To contact the editor responsible for this story: Penny Sukhraj at

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