Federal Court of Justice: Threshold for large-scale evasion of taxes is lowered

In a recently published decision given by the Federal Court of Justice on 27 October 2015 (1 StR 373/15) the court broke away from years of established case law. According to section 370 subsection 3 sentence 2 no. 1 of the German Fiscal Code, a particularly serious case of tax evasion always exists if taxes have been understated on a large scale or there was an intention to evade taxes on a large scale. The court assumed large scale as being €50,000 where “real damage” has been caused as a result of tax fraud and as being €100,000 in the case of “endangerment of taxes”. Endangerment of taxes always existed when the taxpayer provided incorrect or incomplete information regarding their tax situation, especially if they had failed to report income. Real damage was assumed to exist if the taxpayer had obtained tax rebates by fraud, especially rebates of input tax, or if they had feigned business expenses. Whether the €50,000 or €100,000 threshold had been breached depended on the kind of tax and the assessment period. If tax returns were filed jointly for several years, the understated amounts for these years were added together.

The Federal Court has now moved away from the distinction between real damage due to tax fraud and endangerment of taxes and dropped its previous case law. Large-scale evasion of taxes now always exists when the amount evaded exceeds €50,000, regardless of whether this occurs due to a failure to report income or due to fake expenses. In this way, the court wishes to achieve more legal certainty, since a uniform threshold for large-scale damage has now been established for other offences as well such as fraud and embezzlement. On the other hand, it says that endangerment of taxes is sufficient for a taxpayer to be subject to punishment for tax evasion, as set out in section 370 subsection 4 sentence 1 of the German Fiscal Code, meaning that the distinction between actual damage and the endangerment of taxes is no longer justified.

This change in case law will have considerable consequences. If large-scale tax evasion exists, the punishment is imprisonment of between six months and ten years – as a rule without the option of imposing a fine instead. Unlike simple tax evasion, large-scale tax evasion becomes time-barred after ten years rather than five. If a taxpayer wishes to make a voluntary disclosure, they will generally have to file additional tax returns for twelve or thirteen years rather than the normal period of ten calendar years under section 371 subsection 1 Fiscal Code.