German politicians demand the abolition of account inquiries, but EU-wide inquiries are constantly increasing – what to do?

*by Andreas Niemack (www.interis.ch ), business economist (lic.oec. HSG), financial advisor for foreign assets (Zurich) and Johannes Fiala (www.fiala.de ), business economist (MBA), lawyer (Munich)
The Federal Ministry of Finance has made it clear: 62,140 account inquiries have been made since the law to promote tax honesty came into effect, two-thirds of them by police authorities and more than 10,000 by tax offices. Does this mean that reports from the cooperative association in Frankfurt about “several million account inquiries last year” or the announcement of individual banks about “hundreds of thousands of inquiries” are wastepaper? Probably not, since the ministry counts the search for several accounts of a certain citizen as a single query, while the banks count each account query as such individually.
How does an account retrieval actually work in Germany? 1. the tax authority must first request the taxpayer to clarify the facts. In doing so, it must point out to him the possibility of retrieving the account (cf. application decree on the account retrieval rules BMF of 10.3.2005, file no. IV A4 – S 0062 – 1/05). If this does not lead to clarification or if the inquiry does not promise success, an account retrieval can be initiated without informing the taxpayer. The following data is retrieved: (a) the name and, where applicable, the date of birth of the holder and of the persons authorised to dispose of the document (b) the name and address of any beneficial owner other than the account holder c) Number of the account / deposit d) Date of establishment and, if applicable, closure of the account/deposit (up to 3 years back) 3. If the result of the retrieval deviates from the taxpayer’s information, the taxpayer must be confronted with the result and asked again for clarification. If the result of the query and the information match, the person concerned must be informed of the query in the tax assessment. 4 The tax office may also inspect account balances and movements directly and independently at the taxpayer’s bank if the person concerned does not cooperate in the clarification or if cooperation is not promising. Are account retrievals possible in countries other than Germany? The times, in which investors, who had gone with their money to Austria, Belgium and Luxembourg, largely felt safe from the grasp of the German tax authorities, are over. Since February, a law has been in force in Germany that essentially aims to enable local law enforcement agencies to track down funds parked abroad in Europe. Germany is not alone in this; it has merely transposed into national law a European Council protocol dating back to 2001. In addition to Germany, Austria and Belgium, twelve other EU countries have taken this step. The remaining EU countries are also obliged to implement it. This means that Luxembourg must also assist law enforcement authorities in tracing illicit funds. With the new law, Austria is also no longer a safe country (from an investor’s point of view). The automated account data retrieval procedure only works in Germany, and a cross-border query does not run by computer, but criminal investigators, after initiating proceedings (which is easy), can ask in the EU state whether the person concerned has an account there. This applies not only to own accounts, but also to accounts held in trust. Once the accounts have been identified, the tax authorities can then obtain information on all account movements. This also includes information on recipient accounts at home and abroad. All this information can be obtained secretly, i.e. without informing the person concerned.
Furthermore, since 1 July 2005 the EU Savings Directive. According to this, banks in all EU states send control notifications to the Federal Finance Office about account holders residing in Germany. This means that the Europe-wide exchange of information on interest income has become a reality and the German tax authorities will know whether a German citizen has invested money in another EU country. The control note on interest income contains: 1. surname, first name and date of birth of the account holder 2nd address in Germany 3. interest payments for the respective year Exceptions are Luxembourg, Austria, Switzerland, Liechtenstein and Belgium. These countries do not send control notices if they have received this instruction from the customer, but retain a withholding tax. The amount of withholding tax on interest will be 15% in 2005, 20% from 2007 and 35% from 2010. These countries thus maintain their banking secrecy and – like Switzerland – levy an anonymous withholding tax on interest income. 75% of the income is forwarded to the investor’s home state. Combining these two laws, there are now only two countries in Central Europe where banking secrecy is still integrally intact: Switzerland and Liechtenstein, although for Liechtenstein it should be noted that, unlike Switzerland, it is a member of the EEA. In addition, especially in Switzerland, there are very professional services provided by the banks and the advantage of being able to speak German, which makes these countries ? and Switzerland in particular – makes it an attractive alternative for investors who attach great importance to the protection of banking secrecy. After leading tax politicians of the CDU/CSU have taken note of the capital outflow from Germany (experts speak of 350 million euros), some are already calling for the abolition of automatic account monitoring and pleading for a so-called final withholding tax on interest income. At the same time, however, the deterringly high taxation of interest of up to 50% would have to be reduced to the customary 25-30% abroad. This could be prompted by a ruling of the Federal Constitutional Court on account retrievals, which is expected in autumn 2006. However, such a final withholding tax is not expected until 2008 at the earliest.

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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