Legal and illegal tax evasion for ordinary earners and the middle class?

Ways to absolute tax exemption for every federal citizen – or tax evasion deluxe

National budgetary law is considered the supreme discipline of parliaments. Already in the European Community (EC) the design principle applied that the member states compete with each other through national laws on income taxation. This has led to international corporations being able to reduce their tax burden to less than 1% through supposedly legal tax evasion, while the middle class pays perhaps around 30% in taxes on profits. So far, only the US tax authorities are investigating a software company and its management for dubious tax practices.

No tax liability anywhere as a world traveler?

A good idea in principle, which some states tolerate, is not to stay too long in any country. This lifelong restlessness allegedly avoids a domicile – in Germany this would raise the question of a forbidden tax avoidance and could lead to the question of where the centre of life lies, viewed internationally. Then it is decided whether only domestic sources of income or world income would have to be declared.

The next thought is to present oneself as a foreigner at one’s bank so that one’s securities income is not subject to withholding tax at the source there. After all, you can buy a citizenship in Europe, just as there are professional brokers of diplomatic passports nearby. The new citizens are expected to make a substantial investment in the country, but this does not change the rules of local tax liability. The diplomatic passports are not worth the paper they are printed on without real accreditation, because they do not guarantee any immunity.

It seems more promising to surround oneself with the appearance of genuine mercy and to establish a religious foundation with the recommendation of ecclesiastical dignitaries. The responsible trustee or abbot will, if he does not forget and millions of allegedly unknown origin then turn up in his estate, favour the founder or his family in his will – without any obligation to report to the state. The so-called mafia is said to operate in such a way and successfully in different regions.

There are also tingling moments in this model of tax avoidance, for example when it becomes known that the order has in the meantime put its own assets into illegal business through capital investments, or that a monastery has literally let itself be advised into the ground by private bankers with regard to sustainable investments.

True care is promised by business opportunities with the mediation or support of foundations or monasteries, it is said. Not only were honorary doctorates and elevation to the princely state possible in return for a donation, but also the purchase of a canonization or donation receipts for a handling fee of perhaps two percent of the nominal amount shown.

Presumably “spiritual Alzheimer’s” was a cause of these activities. The honorary ecclesiastical doctorate, perhaps for 30 US dollars from the USA, has the distinct charm that one will not be held up for restitution as a tax dodger, as in the case of the State Order of Merit.

Living under the bridge – or in a houseboat

If you like to get used to the fact that the ground always sways a little under your feet, you can live in a houseboat. If you don’t have a permanent mooring on a piece of land with access to the shore, you don’t need to register, according to the fine details of the German registration law – you only have to deregister at your previous place of residence. Only those who live in a dwelling must be registered. § Section 20 of the Federal Registration Act provides:

For the purposes of this Act, dwelling means any enclosed space used for living or sleeping. … Caravans and mobile homes are only to be considered as dwellings if they are not moved or are moved only occasionally.

Exception acc. § Section 28 of the Federal Registration Act: inland waterway vessels and seagoing vessels under federal flag registered in a register of ships in Germany.

The authorities already have considerable difficulties with this way of life. In this way, you can combine the option of living under the bridge – in a room with a roof, but without walls all around – with a certain comfort. On Lake Constance or the Rhine, the country of residence can be changed more often than occasionally simply by changing the shore.

EU interest deduction and reporting obligation

In the EU, finance ministers praise themselves for having curbed tax evasion through automatic data exchange, mandatory reporting and/or withholding tax – but only 53 of 191 OECD countries are doing so. However, this only applies in any case if the bank account with custody account was set up in the name of a natural person with, for example, a German passport. This is extremely easy to circumvent, for example by buying a second-hand anonymous limited from a Cypriot tax advisor – this first of all shields the asset owner by name. In addition, the door is often opened to creative accounting, depending on the customary practice in the country, for example with bogus invoices from emirates. Now that Singapore has softened its banking secrecy, the caravan of tax-neutral money is already moving on – but only on paper, by transferring to a branch for more flexible tax avoidance, even if the adviser still visits his clients at home or continues to accompany and support them from a supposedly now more transparent ex-tax haven.

No one would guess when the first “exterritorial treasury” of Swiss or other banks was established in northern Bavaria? It may be extremely prominent clientele or a potato farmer. To this day, people still like to travel on the “Black Money Express” – but in the past, computer data was not secured in any way. On-site service is a must.

Estate and tax planning via foreign countries

The service also includes the establishment of trusts, for example in Australia, Delaware, Singapore or New Zealand. The widely advertised advantages prove to be a boomerang in estate and tax law, with unnecessary additional burdens. As a banker, one has no interest in an accurate premature clarification, because if something seems secret and advantageous, the customer gladly pays X times the salary and can more easily put away advisory errors. Just as it is and has been the business of many a mountain trustee to assist in the secrecy of estates – on recalculation the fees and expenses could turn out to be more expensive than the estate tax.

It is particularly bitter when the inherited substance has been lost through speculation and a normal self-disclosure seems to be out of the question. The regrettably half-knowledgeable bank advisors fish in the same murky waters as translators who organise an insolvency abroad as advantageous – only to find out later that German courts reject their approaches as legally erroneous (Landgericht Köln, judgment of 14.10.2011, ref. 82 O 15/08).

The anonymous ATM bank card

Another ace up the banker’s sleeve is the anonymous ATM debit card. It does not bear a name, so the owner cannot be identified. The credit institution always recharges these for the customer and is especially recommended for Germans. In Spain, bank(st)ers could use it to conveniently rob their own bank. It was not to be expected that Swiss authorities would now support German investigators in searches in Switzerland. Even less that the foreign “fun cash” bought a few securities without orders, which later expired without repayment, so that the ATM card could not be recharged. The banker then dryly wrote that the complaint should have been reported within four weeks according to the GTC. Even if the customer didn’t find out about the account deletion until months later?

If the bank client has good nerves, he still gets advice from the banker: If tax evasion is discovered, there is a lack of staff everywhere to check the files carefully and to recalculate – our clients, including defence lawyers, then always come off better on average than those who dutifully declare everything. As was the case recently with a prominent billionaire, where the court heard a tax investigator who was at best able to estimate anything.

No, we are not a tax haven

When corporations are able to legally deposit a few patents in a foreign company (patent box) or, like a bookselling corporation, license its name rights from abroad without paying any significant taxes in Germany in order to skim off the profits here, then small and medium-sized businesses become envious – after all, these are tangible competitive disadvantages.

The same applies to the system of financing the company not via a bank but via foreign companies with the prospect of minimum taxation for interest charges of up to EUR 3 million each (interest barrier). American corporations are also among the beneficiaries – so why not German SMEs?

Wasn’t there an explicit invitation to hedge funds after the turn of the millennium to participate in the “squeeze-out” of the “Deutschland AG”, i.e. to buy up companies, bleed them dry financially – completely tax-free, and then leave it up to the employees to more or less successfully avert the threat of insolvency by foregoing their wages?

Tax exemption through works of art

If you buy a work of art and hang the painting on the wall in your living room, for example, you can collect the profit tax-free if you sell it later after one year. Via an anonymous telephone bidder abroad, money from a tax haven can thus also be recovered tax-free and at low cost at an art auction. Conversely – should the wife not like the painting by Dix bought for EUR 5 million because it reminds her too much of her first husband Otto – coincidentally also the name of her pet, to which she said “A nice name for a rat” – the EUR 2 million loss on the sale can be claimed as a speculative loss for tax purposes within a year. Once the year is over, it can be sold tax-free to a museum for EUR 7 million, overpriced by EUR 2 million, and then EUR 2 million can be donated to the museum’s charitable foundation as a tax deduction.

Entire collections of paintings can also lie hidden and untaxed in a private home for generations, until everything is barred by the statute of limitations in the end.

Unconstitutional unequal treatment of the taxpayer?

Even “Otto-the-normal-consumer” may feel that he hardly escapes taxation at the source of the wage-payer. If a professor of biology falsifies 60 euro book receipts by noting a subject book title – contrary to the computer code of the cash register – the penalty for tax evasion may be only one month’s salary, but for document falsification three months’ salary are added on top, and he ends up with a criminal record.

The ordinary taxpayer will perhaps have no choice but to take action against his tax assessments, with the prospect of a referral by the Tax Court under Article 100 GG, Section 80 BVerfG for a violation of the requirement of equal treatment (Article 3 GG), as a violation of the citizen’s “right to equal taxation in accordance with his ability to pay and in a consistent manner” (Federal Fiscal Court, BFH decision of 27.09.2012, Ref. II R 9/11).

This BFH submission on inheritance tax had recently been successful when it then states, for example: “There are obviously no reasons of such weight for the tax privileging of monetary assets in an exclusively asset-managing “cash company” that they could support a complete and in the amount unlimited better position compared to other non-business monetary assets or other administrative assets.” (BVerfG, judgment of 17.12.2014, Ref. 1 BvL 21/12).

The Federal Constitutional Court (BVerfG, judgement of 09.03.2004, Ref. 2 BvL 17/02) had already decided: “The principle of equality of Art. 3 Para. 1 GG requires for the tax law that the taxpayers are legally and actually equally burdened by a tax law. If the equality in the burden is missed in principle by the legal design of the collection procedure, this can result in the unconstitutionality of the statutory basis of taxation (connection to BVerfGE 84, 239).”

This affects not only the fact that corporations, unlike ordinary workers, have the opportunity to take advantage of government services such as infrastructure in our country, entirely without taxation of the value added here.

Also touched upon is the question of how it can be that tax investigators, on the occasion of overly intensive bank audits, are perhaps obligingly summarily written off as mentally ill. In addition, the meagre staffing of the tax investigation offices, including their public prosecutors as instructors, is affected, because the BVerfG already said in the above decision: “Constitutionally prohibited is the contradiction between the normative command of the tax norm that substantiates the obligation and the collection rule that is not designed to be enforced”.

This could potentially curb competition from federal lands in overlooking schemes by some well-known financial houses to illegally reduce taxes on an ongoing basis. Sometimes ministries and courts are just waiting for someone to dare to deal with a long known problem.

On the line of a violation of the principle of equality according to Art. 3 GG was, for example, the decision of the BVerfG of 22.06.1995 (Ref. 2 BvL 37/91), which declared the different valuation of real estate and other assets in the wealth tax to be unconstitutional. Is there perhaps a prospect of income tax being waived in this way?

Ways to a tax paradise

The typical instruments (letterbox company, anonymity, trustee) are offered to nationals – not least by private banks, both domestic and foreign. It is then at best the icing on the cake when state corporations under public law, such as professional pension chambers, on the one hand fall for dubious capital investments and on the other hand seek compensation through allegedly legal tax avoidance abroad. All it probably takes is a match to the open powder keg for those in charge to once again become aware of their officialdom.

In its decision of 17.12.2014, the Federal Constitutional Court still referred to the welfare state principle of Article 20 para. 1 of the Basic Law: It further secures the decision and only makes its justice dimension fully visible. Inheritance tax not only serves to generate tax revenue, but is at the same time an instrument of the welfare state to prevent wealth from accumulating in the hands of a few down the generations and growing disproportionately on the basis of origin or personal ties alone.

If you talk to bankers and insurance professionals, the vast majority of black money is hoarded domestically right under the eyes of the state. Some tax investigators then say that they are not allowed to attack this or that they are overburdened with personnel anyway. Then one asks oneself why this treasure, which can hardly be hidden without problems, has not been lifted long ago?

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 incorrect taxation” (cf. BFH, judgment of 24 April 2013, file no. II R 17/10). Freely after the motto: Why should actually the tax honest be the stupid one?


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


published in Telepolis on 12.01.2015

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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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