Overview
Legislation
What is the relevant legislation relating to tax administration and controversies? Aside from legislation, are there other binding rules for taxpayers and the tax authority?
The most relevant codes governing tax administration and tax controversies are the Fiscal Code and the Tax Court Code. The Fiscal Code codifies, inter alia, the rules for the administrative taxation procedures (competent tax authority, filing of tax return, tax assessment, tax audit, administrative appeal procedure) while the Tax Court Code provides for the rules for recourse to tax courts.
Further, there is domestic secondary legislation and international rules laid out in bilateral tax treaties (double taxation agreements and tax information exchange agreements). Multilateral EU regulations and adopted EU directives also (partly) contain regulations on tax administration and tax controversies in the case of cross-border situations.
While the described legislation is, in principle, binding for taxpayers, the courts and the administration, there are also various administrative guidelines, decrees and regulations issued by federal and state tax administrations that are binding for the tax authorities, but not for the taxpayer or courts. Decisions of the Court of Justice of the European Union, the Federal Constitutional Court and the Federal Tax Court are generally persuasive for the tax authorities, although they are only bound to such decisions if published in the tax administration’s federal tax gazette; in certain cases, the tax administration might even issue a decree not to apply a specific decision to other cases.
Relevant authority
What is the relevant tax authority and how is it organised?
Generally, there is a two-tier structure of German tax administration – federal and state level. The state tax administration is further divided into state-wide authorities and local offices with a further level between state-wide authorities and local tax offices in some states.
The competent authority is determined by the type of tax concerned.
The majority of taxes are administered by:
- the state tax administration – either as an agent for the federal administration (eg, income tax, corporate income tax, value added tax);
- in their own right (eg, gift and inheritance tax, real estate transfer tax); or
- by assessing the tax basis for the taxes levied by the local municipalities (eg, trade tax).
As a consequence, the local tax office is the primary contact for the taxpayer, although different local tax offices may be competent for different taxes.
Customs and excise taxes (in particular, energy taxes) are administered directly by the federal tax administration through their regional customs offices.
Enforcement
Verification of compliance with tax laws
How does the tax authority verify compliance with the tax laws? Does this vary for different taxpayers or taxes?
All potential taxpayers must be registered with the tax administration authorities. While individuals receive a nationwide identification number, companies and other entities are, in principle, obliged to notify the competent tax office and the municipalities of circumstances that affect their status as taxpayers in Germany. Taxpayers who fail to do so might be subject to penalties.
The tax authorities verify that registered taxpayers file their tax returns when due and enforce the submission of such tax returns including by way of penalties, interest or issuing tax assessment notices with estimations of the potential tax burden.
The tax authorities review submitted tax returns in terms of consistency, plausibility, cross-checks (including with other tax offices) and, in some cases, evidence, also on the basis of focus areas varying each year. If clarifications or additional evidence are required, the tax authorities will generally send a request in writing to the taxpayer before issuing tax assessment notices.
A desktop review can take between a few weeks and a couple of months depending on the workload of the tax office, the amount of taxes to be assessed (and, in particular, any refunds to be paid out) and the quality of the tax return.
Self-assessment tax returns that qualify as tax assessments subject to audit and, in cases where tax assessment notices are anyhow issued subject to audit (as is the case for most companies), are often not subject to a detailed desktop review as the authorities rely on the much more detailed review of a subsequent field tax audit.
Timely payment of taxes is enforced by penalties and interest charges.
Tax return review procedure and limitation periods
What is the typical procedure for the tax authority to review a tax return and how long does the review last? What limitation periods apply?
There are various reporting requirements for taxpayers under German tax law depending on the type of tax concerned. As a general rule, individuals are subject to fewer reporting requirements as they are generally only subject to income tax on income (such as wages) where the tax basis is comparably easy to assess and where, in many cases, the tax is pre-paid by way of wage tax.
By contrast, companies and other businesses are subject to further taxes leading to more and more complex reporting obligations, in particular value added tax (VAT) and wage tax where monthly tax returns are required. Further, the tax basis of corporate income and trade tax is usually based on the company’s financial statements and evidenced by their books and (electronic) records.
As a consequence, companies and other businesses (including self-employed individuals) can be subject to an on-site field tax audit without further preconditions while, for other taxpayers, this is only allowed under additional requirements (eg, where there is a need to clarify the circumstances relevant for taxation and, where due to the nature and scope of the circumstances to be examined, it is impractical to conduct an examination at the offices of the competent authority).
Thus, tax assessment notices to individuals are, in many cases, finally assessed based on a desktop review and only in limited cases (in particular, for high-income taxpayers) issued subject to an audit. By contrast, tax assessment notices of companies (including self-assessment tax returns) are mostly issued subject to an audit.
Besides such general on-site field tax audits, businesses may also be exposed to special field tax audits (eg, regarding wage tax or VAT).
Tax authority requests for information
What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?
For each potential taxpayer, the tax authority investigates the legal and factual circumstances, which are significant for taxation, ex officio. The taxpayer is, however, obliged to cooperate with the authorities in establishing the facts of the case and has to fully and truthfully disclose all facts relevant for taxation.
Thus, for the purpose of investigating the facts of the case more in-depth, the tax authority may – at its reasonable discretion – request written or oral information of any kind from the taxpayer or other persons, or have documents submitted by the taxpayer or third parties. Those documents include books and records, business papers and other documents. It may, in particular, request the details of the taxpayer’s creditors or of recipients of payments made by the taxpayer.
The tax authority may question both the taxpayer and other persons. Other persons may include employees of the taxpayer. However, persons other than the taxpayer should be required to provide information or to submit documents only if the clarification of the matter by the taxpayer does not or is not likely to produce any results.
The vast discretionary powers are, however, subject to the general principle of proportionality (in particular, if a third party is requested to provide information). In other words, any requests or enquiries need to be suitable, necessary and reasonable to facilitate the taxation of the relevant taxpayer.
Taxpayer failure to provide information
What actions may the tax authority take if the taxpayer does not provide the required information?
The tax authority may ask the taxpayer to provide an affidavit confirming the information provided is correct. If the affidavit is later proven to be wrong or incomplete, the taxpayer can be subject to criminal prosecution for an erroneous affidavit in addition to tax fraud.
Further, the tax authority may instigate coercive measures, including coercive fines of up to €25,000 or substitutive execution (namely, by commissioning another party to undertake the action at the liable taxpayer’s expense).
In practice, however, the right of the tax authorities to issue assessment notices based on an estimated tax basis is the most common and effective enforcement measure. The tax authorities may, in particular, apply such an estimate where the taxpayer breaches his or her obligations to cooperate, or where the taxpayer cannot furnish accounts or records that he or she is obliged under tax laws to store. Experience shows that these estimates are generally higher than the actual tax liabilities and in doing so, provide an effective incentive for the taxpayer to provide the requested information.
Protecting commercial information
How may taxpayers protect commercial information, including business secrets or professional advice, from disclosure? Is the tax authority subject to any restrictions concerning what it can do with the information disclosed?
In principle, taxpayers have no right to refuse to cooperate in taxation proceedings. In particular, they cannot rely on a bank, business or trade secret. However, certain personal relations of the taxpayer are privileged, and thus certain people have the right to refuse to furnish information and documents (eg, relatives of the taxpayer or advisers with professional confidentiality rules including lawyers and tax consultants).
Given the very limited rights to refuse disclosure of information, the tax authorities are bound to strict tax secrecy. A tax officer breaches this secrecy rule if he or she discloses or makes use of, without authorisation, a third person’s personal data or a corporate or commercial secret that he or she has gained access to:
- in the course of a tax administrative procedure;
- in proceedings before a tax court;
- in a criminal tax proceeding before a criminal court; or
- by notification of a tax authority.
Such a breach is sanctioned as a criminal offence.
Limitation period for reviews
What limitation period applies to the review of tax returns?
Alternative dispute resolution
What (if any) alternative dispute resolution (ADR) or settlement options are available?
There is a mandatory internal administrative appeal proceeding within the tax authority. Anyone who claims to be aggrieved by a tax administrative act – in particular, by a tax assessment – can file such administrative appeal within one month after receipt of the relevant notice. The appeal has to be submitted in written or electronic form or filed orally with the tax office whose administrative act is being disputed. The appeal is decided on by a special appeals department within the tax office, which re-examines the matter in its entirety. If the appeals department does not remedy the appeal in full, the taxpayer can contest the decision in court. The administrative appeal proceeding is, however, not ‘alternative’ in the sense that the taxpayer can freely decide to use it or not but a mandatory appeal level before the tax assessment can be contested in court.
To avoid a future dispute, the taxpayer may file an advance binding ruling request asking for confirmation of the tax treatment of certain facts and measures by the competent tax office. If granted, the tax authorities and tax courts are then bound to the confirmed view. A binding ruling request is only permissible with respect to questions of law and needs to be applied for and granted prior to implementation.
As tax authorities are strictly bound to apply the law, settlements are generally not permissible in tax matters although certain limited exceptions exist. The most important one being the agreement on tax-relevant facts and circumstances, which are permissible if such facts and circumstances cannot be investigated or only with difficulty.
In addition, under the law implementing the EU directive on tax dispute resolution and under applicable tax treaties, alternative dispute resolution mechanisms are available for cross-border disputes, such as advance pricing agreements or mutual agreement procedures.
Collecting overdue payments
How may the tax authority collect overdue tax payments following a tax review?
Tax assessment notices including self-assessment tax returns are enforceable without any court proceeding unless the taxpayer has appealed such proceeding and the tax authorities or a court have suspended the enforceability of such notice. Generally, the tax authority is supposed to and will usually issue a reminder before moving to enforcement.
If the taxpayer does not pay a tax liability due under a tax assessment notice despite such reminder, the tax authority has a wide margin of discretion in deciding which assets to enforce and to what extent.
It can issue an attachment and sequestration order with respect to receivables (including salary claims) ordering the third-party debtors of the taxpayer not to make payments to the taxpayer and to refrain from any disposition over the receivable; the third-party debtor (eg, the employer of the taxpayer) is then no longer entitled to settle the claim towards the taxpayer, but only by payment towards the tax authorities. The tax authority may also seize movable assets and sell them at a public auction or seize real estate (eg, by registering a security mortgage and a subsequent compulsory auction). Under certain extreme conditions, the taxpayer can even be arrested.
To identify property that is available for seizure, the taxpayer may be requested to render an affidavit disclosing all assets and properties as well as all sales of assets to related parties within the previous two years, and any properties transferred free of charge in the past four years.
Penalties – scope of application
How are penalties calculated?
What defences are available if penalties are imposed?
In what circumstances may the tax authority impose penalties?
Any person who fails to comply with the obligation to file a tax return, or fails to do so on time, may be subject to a late-filing penalty. The same applies to the late payment of taxes.
The tax authorities may also impose coercive fines upon a taxpayer for breaching other obligations (eg, obligations to provide requested information).
Penalties – calculation
How are penalties calculated?
The late-filing penalty is 0.25 per cent of the assessed tax less the sum of assessed prepayments and withheld taxes to be credited, for each month or part of a month that a return is late, and no less than €25 for each month or part of a month that a return is late. The total penalty is, in principle, capped at €25,000 except for late real estate transfer tax notification where no cap applies.
The penalty for a late tax payment is 1 per cent of the overdue tax liability per month (12 per cent per annum). Late payment of a partial month triggers the late payment penalty for the entire month.
Penalties – defences
What defences are available if penalties are imposed?
Notices ordering the payment of a penalty are subject to appeal and can be contested in court.
Late-filing penalties may be challenged if the taxpayer demonstrates that the delay was excusable (eg, illness, accident, old age). Reliance on advisers does not excuse the taxpayer as any fault by a representative of the taxpayer (including attorneys, accountants or tax advisers) is attributed to the taxpayer.
In their guidelines, the tax authorities also allow for a waiver of late payment penalties if such penalties would pose an undue hardship on the taxpayer (eg, sudden illness or if an otherwise compliant taxpayer missed the deadline for the first time).
Collecting and calculating interest
In what circumstances may the tax authority collect interest and how is it calculated?
Interest on tax liabilities only accrues if expressly provided for in the German Tax Code or the specific tax laws. Interest accrues on tax debt for the benefit of the tax authorities and on tax refunds for the benefit of the taxpayer.
Generally, tax debt and tax refund claims with respect to income tax, corporate income tax, property tax and VAT or trade tax are by default interest bearing. This regular interest starts to accrue 15 months following the calendar year in which the tax liability arises (namely, normally 15 months after the relevant tax assessment period has ended) and ending when the tax assessment notice becomes effective (generally on the day it is received or deemed to be received).
For all taxes, interest is also charged under specific circumstances. Such specific interest arises if, and as long as, the tax payment is deferred or suspension of payment is granted. Specific interest is also charged by the tax authorities on any evaded taxes. In turn, a taxpayer who has contested a tax assessment in court but has previously paid the tax is entitled to interest on tax refunds for the time period during which the court proceedings were pending.
The interest rate across the board used to be 0.5 per cent for each full month (6 per cent per annum). However, this fixed rate was held to be unconstitutional by the Federal Constitutional Court with respect to the default interest for interest periods starting 1 January 2019. Following this court decision, the interest rate for default interest was retroactively changed to 0.15 per cent for each full month (1.8 per cent per annum) commencing on or after 1 January 2019 and will in the future be re-assessed every three years based on the statutory base interest rate, which is directly influenced by the reference European central banks. The interest in specific cases (eg, in case of suspension of payment) remains to be calculated with a rate of 0.5 per cent for each full month (6 per cent per annum) and also for periods after 2018.
Criminal consequences
Can criminal consequences arise as a result of tax non-compliance? Are these different for different types of taxpayers?
Tax evasion is a criminal offence punishable with a monetary fine or up to five years or, in severe cases, 10 years and six months’ imprisonment. Such custodial sentences require an individual to have intentionally provided the tax authorities with incorrect or incomplete information about tax-relevant facts or failed to inform the tax authorities about tax-relevant facts when obliged to do so (in particular, omitted or delayed tax returns) and, as a result, evaded taxes or obtained unjustified tax advantages for him or herself or for another person.
The rule does not differentiate between types of taxpayers, but tax evasion can only be committed by an individual either for his or her own benefit where the individual is the taxpayer or for the benefit of another taxpayer, in which case, this can be an individual or business entity. Companies and business entities are not liable to criminal prosecution but they can be subject to a monetary fine if the lead personnel of such companies has committed an offence. However, as the legal representatives of a company are personally liable for the company’s tax compliance, in particular, for its obligation to file tax returns when due, they may face criminal prosecution if tax returns of a company or other business entity turn out to be omitted, delayed or incorrect.
If the tax evasion is committed by gross negligence instead of intent, it is categorised as a misdemeanour, carrying a fine of up to €50,000. In addition, several other criminal and misdemeanour tax offences exist (eg, endangering of withholding obligations, obstruction of tax and smuggling).
Criminal and misdemeanour offences are prosecuted by the public prosecutor’s office and specialised departments in the tax offices and are heard by the criminal courts, not the tax courts.
Tax avoidance
Are there specific rules or provisions regarding perceived tax avoidance?
German tax law includes rules and provisions that are intended to fight structures and schemes that are perceived as tax avoidance, including the provisions implementing Council Directive (EU) 2016/1164 (Anti-Tax Avoidance Directive). While the general anti-abuse provision is stipulated in section 42 of the Fiscal Code, the more specific rules are included in various tax acts (in particular the Income Tax Act).
Specific rules include, inter alia, the interest barrier rule limiting deduction of otherwise deductible interest exceeding 30 per cent of tax on earnings before interest, taxes and amortisation, the hybrid mismatch rule limiting the expense deduction in hybrid mismatch situations (namely, where, as a consequence of a different qualification of a hybrid instrument or an entity, expenses would be deducted twice or without a corresponding income inclusion between related parties or in structured arrangements). Further, low-taxed passive income of controlled foreign companies is included in the German tax base of the controlling entity or person and taxed at the relevant regular income, corporate income and trade tax rate under the controlled foreign corporation provision of the German Foreign Tax Act.
Further, in the Act to Combat Tax Avoidance and Unfair Tax Competition, Germany has adopted further and stricter rules for transactions with residents of non-cooperative jurisdictions for tax purposes as listed by the European Union, which entail, inter alia, non-deductibility of expenses, stricter controlled foreign company rules, withholding taxes on payments to such jurisdictions and limitation of participation exemption.
Enforcement record
What is the recent enforcement record of the authorities?
In 2020, 12,664 auditors conducted external audits. The external audits generated additional revenues of around €11.2 billion. Also, 152,649 businesses out of 8.4 million businesses listed in the tax authorities’ business register were audited. In addition, 6,151 external audits were carried out in other cases, including taxpayers with significant income. A total of €7.9 billion of the additional revenues were derived from large-entity audits. The external audits of micro-entities generated additional revenues of €1 billion. The largest share of the additional revenues for 2020 was derived from trade tax accounting for 23.4 per cent and €2.6 billion and income tax accounting for 20.6 per cent and €2.3 billion. In addition, however, corporate income tax at 20.4 per cent (€2.3 billion) and sales tax at 13.7 per cent (€1.5 billion) also accounted for a significant share of the additional revenues. Other taxes account for a share of 7.3 per cent (€800 million). Interest amounts account for a share of 14.5 per cent (€1.6 billion). Figures for 2021 are expected in October or November 2022.
Third parties and other authorities
Third-party involvement with tax reviews
Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries?
Can a tax authority involve third parties as part of the authority’s review of a taxpayer’s returns?
The tax authority has various powers to verify the accuracy of the taxpayer’s submitted tax return including the involvement and investigation of third parties (eg, by requesting information or documents). This includes financial institutions. The provision in the German Tax Code protecting the fiduciary relationship between banks and their customers and limiting the investigative powers of the tax authorities has been repelled.
However, in general, any investigation and involvement of third parties (in particular, information requests) needs to be based on specific reasons. Investigations without such basis (eg, fishing expeditions) are generally not admissible. Further, certain relationships are privileged, and certain people have a right to refuse to furnish information, including close relatives and advisers with professional privilege. Moreover, persons may refuse to answer any questions to which a reply would expose them, or one of their relatives, to the risk of prosecution for a criminal or administrative offence.
Where no such right to refuse cooperation exists, the tax authority may enforce the third party’s obligations to cooperate by means of coercive measures; in particular, coercive fines.
Cooperation with other authorities
Does the tax authority cooperate with other authorities within the country? Does the tax authority cooperate with the tax authorities in other countries?
Within Germany, all authorities (administrative authorities and courts) cooperate with each other by providing administrative assistance. The assistance might be provided on the basis of requests or automatically by other authorities without an explicit request. This is particularly the case where authorities or courts (but also broadcasting companies, notaries, credit institutions, insurance companies and asset managers) become aware of certain circumstances relevant for taxation, in which case they have to make a control notification to the relevant tax authority.
In addition, administrative assistance and cooperation exists at international level under tax treaties and, most importantly, the laws implementing the European Union Directive on administrative cooperation (Council Directive 2014/107/EU amending Council Directive 2011/16/EU), which provide information exchange upon request, cross-border enquiries and automatic and spontaneous exchange of information.
Financial or other hardship
Voluntary disclosure and amnesties
Do any special procedures apply in cases of financial or other hardship, for example when a taxpayer is bankrupt?
The tax authorities can grant certain equity easement measures if enforcement of a tax obligation is unreasonable or inequitable. This can apply where enforcement of the payment would cause financial or other hardships for the taxpayer (including potential bankruptcy). Such equity easement measures include deferral of payment deadlines, payment in instalments or, in certain cases, even a full or partial waiver of the tax payment obligation. However, given that taxes are to be levied strictly by applying the law and ensuring fair treatment of all taxpayers, the requirements – particularly for a waiver – are rather strict.
Are there any voluntary disclosure or amnesty programmes?
There is a voluntary disclosure programme that protects against criminal liability as long as no notice of a field tax audit or prosecution has been given and the offence has not yet been detected. However, the voluntary disclosure has to meet strict requirements to be valid. In particular, it has to be complete meaning that it needs to cover a period of at least 10 years, and the evaded taxes plus interest need to be timely paid upon request.
Further, if the evaded taxes exceed €25,000 per criminal act (often each tax and year constitute one act), the disclosure is only valid if additional fines are paid: 10 per cent of evaded taxes under €100,000, 15 per cent of evaded taxes between €100,000 to €1 million and 20 per cent over €1 million. The fines need to be paid by each individual seeking protection.
It is strongly recommended to seek legal assistance before filing a self-disclosure.
Rights of taxpayers
Rules protecting taxpayers
What rules are in place to protect taxpayers when dealing with the tax authority?
As the first layer of protection, the tax authorities are strictly bound to the law, which regarding taxes provides for rather detailed and specific provisions. Individual protection is specifically provided in the tax laws and safeguarded by the German Constitution by granting the taxpayer, for example, the right to be heard, to be informed, to appeal and to have access to privileged legal assistance and to an independent judicial system. Further, the tax laws impose additional obligations on the tax authorities, most importantly to keep any tax information secret, and, when investigating the case ex officio, execute discretion reasonably and consider facts and circumstances also in favour of the taxpayer.
Requesting information from tax authority
How can taxpayers obtain information from the tax authority? What information can taxpayers request?
In the appeal procedure, the taxpayer has a right to inspect his or her tax file upon request. He or she can inspect the complete tax records and documentation of the tax office relevant to the respective taxpayer and the respective tax period, including:
- calculation;
- information returns;
- expert opinions;
- evidence collected;
- information requests;
- witness and third-party statements; and
- notes by the tax officers.
Oversight of tax authority governance
Is the tax authority subject to non-judicial oversight?
The local tax office is subject to oversight by its superior authorities at the state and federal levels. There is, however, no official taxpayer advocate, ombudsman or similar role.
The taxpayer can appeal an assessment or other administrative action at the respective tax office’s internal appeals department.
Court proceedings
Competent courts
Which courts have jurisdiction to hear tax disputes?
In Germany, the tax courts have jurisdiction to hear tax disputes. There are 18 tax courts in Germany. Each tax court is divided into senates. Each senate consists of three professional judges and, in the oral proceedings, two non-professional (honorary) judges.
The judgments of the tax court are subject to appeal to the Federal Tax Court. The tax courts are the only instance deciding on the facts of the case. The Federal Tax Court only decides on questions of law on the basis of the facts adopted by the tax court or on the question of procedural defects. Thus, generally, no new facts or evidence can be brought forward at the Federal Tax Court level unless the relevant party successfully argues that the tax court has infringed upon a procedural rule by not hearing or considering the fact or evidence.
Lodging a claim
How can tax disputes be brought before the courts?
An internal administrative appeal procedure within the tax authority needs to be completed before bringing the matter to the tax courts. If the taxpayer is not remedied in full by the appeals department’s decision, the taxpayer can file a lawsuit with the tax courts without any applicable minimum amount threshold. The statement of claim lodging the lawsuit needs to name the parties, the matter of the claim and the administrative appeal decision; it is generally advisable to attach a copy of the administrative appeal decision to the statement. The lawsuit must be filed in writing or on the record of the clerk of the court’s office. The statement does not need to include the arguments that may be filed later. Before the first instance tax courts, the taxpayer may lodge the lawsuit him or herself. Professional representation (eg, by attorneys or certified tax advisers) is permissible and generally advisable but mandatory for disputes filed with the Federal Tax Court.
Combination of claims
Can tax claims affecting multiple tax returns or taxpayers be brought together?
Several claims may be combined by the claimant in one proceeding if they are filed against the same defendant, are related and the same court has jurisdiction. Also, several claimants can combine their cases if there is a legal or factual connection between the claims. However, the tax courts have discretionary powers to consolidate or divide pending cases by way of a court order to hear and decide them jointly or separately.
Pre-claim payments
Must the taxpayer pay the amounts in dispute into court before bringing a claim?
Neither the filing of an out-of-court appeal before the tax authorities nor the filing of legal action before the court suspends an obligation to pay the taxes due under the challenged tax assessment notice. Thus, such tax needs to be settled in favour of the tax authorities.
The taxpayer can, however, apply for a suspension of payment, which can be granted by the tax authorities or, if they deny it, the court. The tax authorities or the court shall grant such suspension where there are serious doubts as regards the legality of the challenged administrative action (eg, the tax assessment notice) or if its execution would cause unreasonable hardship to the taxpayer and is not justified by an overriding public interest. Generally, the courts apply a summary assessment of the prospects of success of the case that, in practice, can lead to a certain practical pre-determination of the court. Because of this, and as suspended tax payments bear interest, the taxpayer should carefully consider all options before applying for a suspension of payment.
Cost recovery
To what extent can the costs of a dispute be recovered?
Proceedings before the tax court trigger court fees plus ancillary costs (eg, witness expenses) and, in most cases, fees for the taxpayer’s counsel.
If and to the extent the taxpayer succeeds in court, court fees are fully compensated. The fees for the taxpayer’s counsel are compensated at amounts calculated on the basis of the value in dispute in accordance with statutory rules. Such compensation may be lower than the fees under fee agreements with counsel (in particular, where the counsel is remunerated on an hourly basis).
The cost and expenses of the tax authorities are not recoverable (namely, they do not have to be borne by the taxpayer if he or she is not successful).
Third-party funding
Are there any restrictions on or rules relating to third-party funding or insurance for the costs of a tax dispute, including bringing a tax claim to court?
There are no restrictions on, or rules relating to, third-party funding or insurance for the costs of a tax dispute, including bringing a tax claim to court. In fact, insurance for disputes (at least for private individuals) is generally available in the German market.
Availability of jury trials
Who is the decision maker in the court? Is a jury trial available to hear tax disputes?
Tax courts in Germany are divided into panels called senates. In principle, the senates of the tax courts decide by way of composition of three professional judges and two magistrate judges (namely, laypersons). The magistrate judges do not participate in decisions without oral hearings.
The senate may assign the case to one of its (professional) members as a single judge if the case does not present any particular difficulties of fact or law and the case is not of fundamental importance.
The senates at the Federal Tax Court consist of five professional judges.
The tax courts – as is the German court system in general – are non-jury bench trials except for the two magistrate judges.
Time frames
What are the usual time frames for tax hearings?
At the level of the regional tax courts, proceedings take an average of 12.5 months. The average duration of all proceedings at the Federal Tax Court was nine months in 2020, as in the previous year. This figure includes all types of proceedings, including non-admission appeals and legal aid requests. In the case of appeal proceedings, the average duration of proceedings in the reporting year was 20 months.
Note that these average figures include a number of processes that can be decided upon easily and quickly. A more realistic time estimate for a sound process is likely to be two to three years for each instance.
Disclosure requirements
What are the requirements concerning disclosure or a duty to present information for trial?
The tax court investigates the facts of a case ex officio. However, the taxpayer is obliged to cooperate and provide information. The taxpayer shall provide complete and truthful information about factual circumstances and, upon request, submit books, records, business papers and other documents to the court for inspection and examination. In practice, the tax court’s obligation to conduct its own investigation is reduced to a minimum and it mostly relies on the facts, evidence and arguments brought forward by the taxpayer.
It is thus highly advisable to prepare written pleadings that clearly and completely state the taxpayer’s position on the facts of the case and the legal position, substantiate it by submitting evidence and, to the extent necessary, dispute the facts and legal opinions presented by the tax office.
In addition to the evidence submitted by the parties, the court may, in particular, take a visual inspection, hear witnesses, experts and participants, and refer to documents. All authorities are obliged to disclose documents and files of third parties to the court while maintaining the tax secrecy of third parties.
Permitted evidence
What evidence is permitted in tax hearings?
In tax proceedings (including tax court proceedings), the following means of evidence are admissible:
- witness testimony;
- expert opinions;
- party testimony;
- files and documents; and
- visual inspection.
In addition, it is possible to request that authorities or public officials provide documents or official information.
As the tax courts investigate the facts and circumstances ex officio, the court and not the parties decides which evidence is permitted to verify the disputed facts, although a refusal to admit evidence presented by the parties might under certain circumstances constitute a procedural fault on which an appeal or a complaint against a non-admission of appeal can be based.
In particular, the taxpayer’s testimony needs to be permitted by the court to be accepted as evidence. However, in the event of a decision to take such evidence, the taxpayer is obliged to testify. If the taxpayer refuses to testify, the court is free to decide whether it considers the facts alleged by the opposing party to be proven.
If hearings are conducted in the presence of a person who does not speak German, a certified translator will be appointed to assist.
Permitted representation
Who can represent taxpayers in a tax trial? Who represents the tax authority?
Taxpayers may represent themselves in a tax trial before a first-instance tax court. However, he or she may also retain representation, usually by a lawyer or certified tax adviser.
Representation by a lawyer, certified tax adviser or chartered accountant is compulsory before the Federal Tax Court. The tax authority may also be represented by civil servants or employees who are qualified to hold a judicial office.
Taxpayers who cannot afford legal representation may apply for legal aid at the tax court. A person is entitled to legal aid if he or she has to take legal action and cannot afford the necessary costs and if, in the opinion of the court, there is not only a slight chance of winning the case. The granting of legal aid extends to the costs of representation by the party’s tax adviser or lawyer if the court has assigned a tax adviser or lawyer to the party. This must be specifically requested.
The action must be directed against the authority that issued the original administrative act. Thus, the local tax office is generally the defendant and represented by its head although representation can and will often be delegated to another tax officer.
Publicity of proceedings
Are tax hearings public?
Tax court trial hearings are, in principle, public as are most trial hearings in Germany. Public access is intended to strengthen confidence in the administration of justice. However, the court may exclude the public to preserve tax secrecy; it has to exclude the public at the request of the taxpayer who does not need to state any reasons for such request.
The tax authority may not request to exclude the public.
Burden of proof
Who has the burden of proof in tax hearings?
The tax court investigates the facts of a case ex officio. Consequently, there are no explicit burden of proof regulations codified in tax law. According to the case law of the Federal Tax Court, the tax authority bears the burden of proof for the existence of the tax claim and the taxpayer for tax-reducing facts.
If the taxpayer does not, however, comply with her or his obligations to cooperate, the tax court may draw disadvantageous conclusions for the taxpayer.
Case management process
What is the case management process for a tax hearing?
Proceedings before the tax court are initiated by filing a statement of appeal. Afterwards, the course of further proceedings depends on the individual case and lies entirely in the hand of the court.
The court:
- can split or combine pending cases;
- refer the case to a single judge;
- issue written instructions or enquiries; and
- issue an order to collect evidence or schedule a pre-hearing to discuss the factual and legal circumstances with the parties involved.
In most cases, the court will simply set deadlines for submission of the written pleadings by the parties and, after written pleadings are exchanged, schedule a main hearing (with or without evidence collection) on the basis of which it intends to decide the case.
The date of a hearing is set by the court at its discretion with a statutory period for the summons notice of at least two weeks but the notice is usually sent earlier. Further, in case of time conflicts, a request to change the date of the hearing is usually granted.
Pre-hearings, hearings and questioning of parties, witnesses and expert witnesses are generally permissible, albeit historically, were not widely used. This seems to have changed because of the covid-19 pandemic and at least some tax courts seem to be more open to such hearings although the decision lies within the discretion of the individual judge or senate. By contrast, the Federal Tax Court decided in 2021 that, despite the pandemic, it lacks the required secure infrastructure to conduct such video hearings and thus cannot schedule such hearings.
Appeal
Can a court decision be appealed? If so, on what basis?
The decision of the tax court can be appealed at the Federal Tax Court if this has been expressly admitted in the judgment of the tax court or if the Federal Tax Court has admitted the appeal after a non-admission complaint. The appeal must be filed in writing within one month after notification of the decision of the tax court at the Federal Tax Court. The statement with the grounds of appeal must be filed within two months after receipt of the decision of the tax court, although this deadline can be extended. The appeal to the Federal Tax Court can only be based on questions of law and not on questions of fact or a procedural defect.
If the appeal was not permitted by the tax court, the defeated party can file a non-admission complaint. The Federal Tax Court also decides on this complaint. The complaint is only admissible if the matter is of fundamental importance; the decision is based on a procedural defect; or a decision by the Federal Tax Court is necessary for the further development of tax law.
At the Federal Tax Court, professional representation is mandatory. The parties have to be represented by a lawyer, tax adviser or auditor.
Update and trends
Key developments of the past year
What are the current trends in enforcement of tax controversies? What are the current concerns of the authorities and taxpayers in relation to the enforcement and handling of tax controversies and are these likely to change? Are there proposals to change the relevant legislation or other rules?
The key change over the past year concerns changes to the audit procedures. Currently, tax audits in Germany need to be ordered within the statutory limitation period (generally, four years after the end of the year in which the tax return was filed) but are itself not subject to any time limitation period (namely, can go on for quite a while). Once the legal change comes into effect (namely, for audits ordered from 2025 onwards), tax audits will generally be subject to a five-year limitation period during which the tax audit needs to result in final tax assessments. However, this rule, which is subject to certain exceptions, comes along with increased compliance obligations for the taxpayer. For example, the taxpayer now needs to provide the tax authorities with the entire transfer pricing documentation within 30 days once an audit has been ordered without any additional request.
Coronavirus
What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?
Law stated date
Correct on
Give the date on which the information above is accurate.
