In Germany, VAT evasion is a serious criminal offense that can result in severe legal consequences for businesses and their executives. It is crucial for foreign companies operating in Germany to understand these regulations to avoid penalties, including criminal charges against their managing directors.
Legal Framework
Definition of Tax Evasion Tax evasion, as defined under Section 370 of the German Fiscal Code (Abgabenordnung, AO), involves providing false or incomplete information to tax authorities or failing to update them about changes that result in an understatement of tax liabilities. This includes intentional acts and gross negligence.
Criminal Liability If a foreign company’s managing director is found to have intentionally evaded VAT, they can face severe penalties, including fines and imprisonment for up to five years, or up to ten years in severe cases. The German law also considers the actions of other individuals involved in the preparation and submission of incorrect tax returns, potentially implicating them as accomplices.
Notification and Legal Process
Yellow Letter from the Tax Office The German tax authorities typically notify individuals of their involvement in tax evasion investigations via a “yellow letter” (Gelber Brief). This formal notification signals the initiation of criminal proceedings.
EU-Wide Enforcement Germany has the capability to enforce tax debts across the European Union. This means that foreign companies with operations in Germany can be pursued for VAT debts in their home countries as well, under the EU Mutual Assistance Recovery Directive.
Steps for Compliance and Risk Mitigation
VAT Compliance Checks WW+KN, a Baker Tilly Company, can assist foreign companies in ensuring their VAT compliance. This involves reviewing VAT filings, verifying the accuracy of submitted information, and liaising with German tax authorities on behalf of the client.
Legal Representation Baker Tilly has specialized lawyers in tax criminal law who can represent and defend the company and its executives. WW+KN, as part of Baker Tilly, collaborates closely with these legal experts to provide comprehensive legal support from the initial investigation to court proceedings.
Obtaining an Exemption Certificate Before commencing activities, foreign construction companies must obtain an exemption certificate (Freistellungsbescheinigung) to avoid the Bauabzugsteuer (Construction Withholding Tax). This certificate is crucial for preventing the withholding of 15% of the invoiced amount by German customers.
Internal Audits and Training Regular internal audits and staff training on German VAT regulations can help prevent unintentional errors that might lead to criminal investigations. Establishing a robust compliance management system is essential.
Practical Tips for Foreign Companies
- Document Retention
- Keep thorough and accurate records of all transactions, VAT filings, and communications with tax authorities. This documentation is crucial during audits or investigations.
- Timely Self-Disclosure
- If discrepancies are discovered, timely self-disclosure to the tax authorities can mitigate potential penalties. This must be done before an investigation is initiated to be effective.
- Professional Advice
- Engaging with tax advisors who are well-versed in German VAT law can help navigate the complexities and ensure that all tax obligations are met correctly.
WW+KN, a Baker Tilly Company, acts as a single point of contact for clients, providing a seamless interface between tax advisory and legal defense services. Contact us at info@vat-germany.com for expert assistance in managing your VAT obligations and defending against any criminal proceedings related to tax evasion. Our integrated approach ensures that your business operations in Germany remain compliant and protected.
