German Government Targets Offshore Tax Avoidance

by Ulrika Lomas,, Brussels

02 January 2017

The German Government has adopted draft anti-avoidance legislation intended to make it more difficult for domestic taxpayers to avoid tax through the use of “mailbox companies in tax havens.”

The draft bill, approved by the Cabinet on December 21, contains more stringent reporting obligations for German taxpayers with foreign financial interests, and financial institutions managing foreign investment structures for their clients.

Under the proposals, taxpayers must make a disclosure to tax authorities if they have a stake of 10 percent or more in an entity such as a company or fund that is located outside of the European Union and European Free Trade Association area, or a stake worth at least EUR150,000 (USD156,800), irrespective of whether the participation is held directly or indirectly. Failure to report such “business relationships” could be punishable by fines of up to EUR25,000.

The draft legislation also places an obligation on financial institutions to report to the financial authorities certain structures that they have established or administer on behalf of clients in non-EU and non-EFTA “third countries.” Failure to do so could attract fines of up to EUR50,000.

The bill also standardizes reporting obligations for direct and indirect holdings in foreign entities and synchronizes the deadline for information reporting with the deadline for tax returns.

German taxpayers with a controlling interest in foreign entities will be required to maintain records for at least six years under the proposed changes. In addition, the draft legislation extends the statute of limitations in cases of tax evasion from five to 10 years.

If the bill is approved by parliament in its existing form, the changes will be introduced on January 1, 2018.

On the same date, the Cabinet also announced that Germany will sign the multilateral instrument to align tax treaties with the OECD’s BEPS recommendations. The instrument – developed under Action 15 of the BEPS project – will transpose BEPS recommendations into over 2,000 tax treaties worldwide, and implement minimum standards to counter treaty abuse and to improve dispute resolution mechanisms.

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