Camouflage constructs in the enforcement practice of the tax office – or tax evasion deluxe* How tax authorities discover incomplete voluntary declarations and find hidden funds

1. the fairy tale of the wild-eyed lone perpetrator

Bankers and representatives of foreign life insurers must be willing to travel and be creative. Even dubious arrangements should at least leave the customer with the feeling that “the tax authorities will certainly not find out”. Revelations followed through offshore leaks, interested journalists, bought up CD-ROM’s, and overly athletic deliberations. To the delight of many an attorney general, bankers also keep lists of “honorary professionals” on hand for their clients when it comes to “accounting trickery” and favorable opinions.

The insurers and credit institutions concerned then counter the accusations made by the Federal Financial Supervisory Authority (BaFin) or the Public Prosecutor’s Office (StA) with the prayerful refrain that “we are cooperating fully with the authorities in the context of the various investigations”. In addition, internal investigations were being carried out which had shown “that individual employees had displayed behaviour on their own initiative which did not comply with the internal standards”. Appropriate measures had been taken vis-à-vis the employees. These soon find similar employment at another institution, as the caravan of clients often simply moves with them and follows the consultant.

 

2. the secrets of the registration law, telephone providers and public utility companies

Kajetan Silberblick (name changed) leads a tranquil life with a lake view in his holiday home. His internationally experienced banker advises him to do as his Russian neighbours “and my colleagues on the bank board” do – the property will be bought by a foreign company, a joint-stock company from Switzerland or Panama, perhaps based in the British Virgin Islands. Of course, a good company has to have a good name, so maybe you name it after a mafia clan or simply call it “Gold Finger Holding SA.” The local notary certifies dutifully and with his, as it were, legal duty of carriage for certifications. Still years later the municipality treasurer is pleased about his international select clientele, because one does not want to give oneself xenophobically opposite paying foreigners, in order to look times who actually produces the domestic refuse for the camouflage construction. Only later, years or decades later, the tax investigation will be able to conclude by pure chance on the basis of the consumption data that there is a centre of life and thus an evasion of the world income by the inhabitants. Even in the heyday of the dragnet, only students who paid for their electricity and telephone bills in cash at the post office were visited by the GSG-9, says the banker with German citizenship.

 

3. in the shoals of international family law: making up to more than 70 million disappear?

In certain circles, says the banker, it is good manners to own a whole series of companies abroad – and a few additional trusts or foundations are allowed. The more complex everything is, the better for the good banker who is called in every month by the boss to report on the sales of such off-the-peg solutions. In the course of time, the number of constructs becomes double-digit, also in order to organize something good for the children’s succession.

But suddenly a problem arises. Father and children married abroad. Let’s say in Spain, in France and in Latin America. There is a matrimonial property regime, the community of acquisitions, by virtue of which, figuratively speaking, every second atom of the assets acquired during the marriage, of every newly established foundation or company belongs to the spouse. And: with one child now threatened with divorce, with up to more than 70 million in family assets, this means a prospect of impoverishment felt as unbearable. The plan to have a marriage contract notarized and backdated in Nigeria fails, because this matrimonial property regime is unfortunately irreversibly fixed and registered during the marriage – it would be different with German matrimonial property regimes. Soon an expert from the banker’s network of advisors is found, to whom the assets are retroactively transferred in return.

In still another respect the banker has suddenly become somewhat monosyllabic. The wife of Kajetan Silberblick owns half of the company assets and she is now dying. With up to a two-digit number of joint-stock companies, foundations or trusts, the banker has his hands full rearranging the circumstances, for example, via bearer shares – without even considering gift tax, because he has no real idea about that; but the consequences are two or three figures, in the millions as unnecessary additional taxes. His bank then issues a cost note for the incorrect advice – perhaps for around 2,000 pounds sterling “for tax advice and wealth management”.

 

4. in the clutches of national inheritance law: how to make up to more than 100 million disappear?

At the end, when the wife has died, the banker immediately has the appropriate advice on his lips. Later, the bank customer will paraphrase it nobly with the words “a little bird told me that”. In a nutshell, the probate court is assured in lieu of an oath that one was married in the matrimonial property regime of the German “Zugewinngemeinschaft” (community of accrued gains) – by such tricks of the shell game, the assets are always where one wants them to be, and the probate court finds nothing more precisely where a tax payment would threaten. The elegant consequence: the assets of the umpteen companies remain outside. The probate court is satisfied with this, and reports this inaccurate statement to the equally guileless inheritance tax tax office. Good faith causes the treasury to miss out on seven- or eight-figure tax revenues. Already the request to present all passports and the marriage certificate would have prevented this, whereas this option would have been and is open to all authorities involved.

This is surprising even for practitioners, because in the case of applications for certificates of inheritance by so-called heir-seekers, detailed documents together with apostilles and translations are required in order to check them in detail before a certificate of inheritance is issued. In the present case, however, the inheritance quotas would not have changed in any case, only the matrimonial property regime would have raised other questions regarding the content of the estate.

 

5. the brutal pedagogy of international corporate law: the entire family is liable for everything

If foreign camouflage constructs, such as foundations, joint-stock companies, establishments or trusts are administered domestically, they are deemed to have moved. This includes not only cases in which a German private bank in Germany manages the assets de facto or by mandate, but also cases in which management is carried out from Germany by telephone or via the Internet. The banker is again helpful here by carefully obtaining and documenting the appropriate powers of attorney for the entire family for the purpose of making provisions “for the smooth co-administrative change of generations”. Most enforcement officers have no idea that tax liability is attached to this – how could they if they do not allow such documents to be seized in appropriate cases?

The de facto relocation of foreign companies, referred to by experts as a change of the administrative seat, has the fatal consequence that, for example, the shareholder of a foreign company is henceforth dealing with a sole proprietorship, or more frequently a general partnership. Thus, if a front company was founded in Singapore, in many cases in Liechtenstein or in Latin America, it always belongs to both spouses already in the case of spouses with the matrimonial property regime of community of acquisitions. With the transfer of the administrative headquarters to Germany, let’s say also through online banking, the shareholders then transform into general partners, i.e. so-called general partners. Both spouses are subject to all tax obligations, not only as spouses who are regularly jointly assessed, but also because both are regularly required to make declarations, which results in personal tax liability even in the case of mere negligence – also for taxes and duties of the other partner(s).

If then, as in our example case, the wife dies, the unlimited, solidary, joint and several, personal liability also for all duties continues without constraint with all heirs. In many cases, they will not have sought qualified advice either. Later, however, the banker will again become somewhat monosyllabic, because the advice of the foreign department for “tax dodging, asset and estate planning” was professionally beside the point.

 

6. money is as shy as a deer

Of course, after a few days, the banker has a solution. Suitable insurers and banks can be found immediately in Germany through personal contacts and in foreign countries close to the border, in exchange for a commission on the transfer, in order to make the father’s assets disappear in the name of the children with a view to silver. Amounts in the single or double-digit millions are transferred. But, of course, it must be admitted that the abundance of companies and constructs now comes in handy. How is a single law enforcement officer supposed to get the idea to take a closer look at audit files or take other measures to track down virtual money?

 

7. tax liability for families and in the financial mafia

The auditors of the tax authorities in cases of income millionaires almost all know that their taxpayers often do not even suspect what assets they own and often forget some things in the tax return completely free of malicious intent. The advisor of a bank or insurance company simply acted with all liberties without thinking of the consequences. The liability of asset managers, including de facto asset managers, is prescribed by law, so that even in cases of (allegedly) asset-less taxpayers or, for example, those who are only unwilling to pay, a liability notice can ensure rapid repayment.

When applying the rules also of international law, with regard to family, inheritance and company law, a surprising abundance of liable debtors regularly arises in the case of families, in particular due to the de facto establishment of an administrative seat in Germany. For the proof of such things one needs also no secret service, but it is sufficient to evaluate the email traffic on the part of the customer advisers of the bank, and the bank files there, conceivably for example as training for prospective diploma financial economists.

The icing on the cake, as it were, would then be to check all powers of attorney for accounts, in search of liable authorised disposers – and to have the incorrect coding of accounts as “for foreigners” in view, whereby the deduction of capital gains tax or final withholding tax was illegally avoided. These would not even be “fishing expeditions”, although certain national and private banks have the reputation of being creatively helpful, perhaps as a gang or commercially or in countless cases analogous to the known individual cases and not only in China.

 

8. when the executor is at the door

A new trend among some fiduciaries is already to undergo a purge themselves due to said liability risks. Exemplary in this respect are some Liechtenstein citizens who reside in Austria in order to legally save taxes. This at least increases the chances for those who hope that their lot will be drawn in the semi-annual lottery for immigration permits, so that they do not have to leave the Principality again every evening after dusk. For the educated enforcement officer or insolvency administrator, this presents an open barn door to execute there, which will take little more than a week or two across the border for the measure there called an execution to be completed.

 

9 Current letter from the Federal Minister of Finance (BMF) on foreign companies

In its BMF letter of 06.01.2014 (Gz. IV C 2 – S 2701/10/10002), the status of foreign companies not registered in Germany is accurately described “If the previous shareholders of the dissolved limited continue its promotional business activities in Germany, their merger is to be regarded under German law as a general partnership (in the case of the exercise of a commercial business) or as a partnership under civil law; if the continuation is carried out by only one shareholder, a sole trader may also be considered.” This applies not only (as dealt with in the BMF letter) to deleted British Limited’s but also to all other foreign companies for which no entry in the local commercial register is made or which can never be made due to our type constraints in company law.

 

10. feigned lack of assets by fleeing abroad?

The discovery of evasion by tax debtors, joint and several debtors or liable debtors can result in the de facto evasion of payment by setting aside the assets. Intergovernmental tax claims, for example, are not enforced due to the lack of an agreement with the USA. However, causing insolvency by a private individual can also be punishable as bankruptcy; and then subsequently without any prospect of residual debt discharge.

However, if the tax or liability debtor has assets in the EU, the EU Council Directive of 16 March 2010 (2010/24/EU) “concerning mutual assistance for the recovery of claims relating to certain taxes, duties and other measures” would come to mind. This means that real estate assets, e.g. in Spain or Italy, can certainly be enforced.

If a debtor purchases goods from suppliers in the EU for his commercial business (for his customers in Qatar, Latin America, UAE, for example), and if administrative or legal assistance exists in this respect under the double taxation agreement (DTA), there is the possibility of enforcement by seizure in rem of the goods ordered. The oath of disclosure can also be enforced abroad (EU-Beitreibungsgesetz – EUBeitrG) unless, for example, the tax debt is less than 1,500 euros.

Passport confiscation from the tax (co)debtor (even if he or she is already living abroad) can possibly force him or her to flee abroad or return, for example if a valid German passport is required by foreign authorities for a residence permit or extension. A popular means, not only since 1937 when Göbbels wanted to move Marlene Dietrich from Paris back to the Reich to UFA after her German passport had expired.

Finally, the debtor can be forced to release his advisors and financial houses from professional secrecy. This also includes those in tax havens, which can then no longer rely on a special legal foreign banking or insurance secrecy. This means that some advertisements with “princely privileges”, for example those of foreign providers of insurance coats, turn out to be nothing more than a nice pretence.

 

11. enforcement possibilities in the future?

The enforcement offices of the tax authorities are already becoming increasingly familiar with the fact that, in the case of evasion via foreign countries, there are far greater possibilities for enforcement in Germany than was perhaps previously suspected. Because the well-known formula “the state has nothing to give away” applies there.

Otherwise, the tax system will be exposed to the suspicion of no longer being in conformity with the constitution “due to a structural enforcement deficit or unconstitutional mis-taxation”. Freely after the motto: Why should actually the tax honest be the stupid one?

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

 

by courtesy of

http://www.liechtenstein-journal.li (Liechtenstein Journal 1/2014)

and

http://www.innovationundtechnik.de (Issue 4, 2014)

 

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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