German cabinet adopts bill to combat tax avoidance

21 December 2016, the German cabinet adopted a bill to impose more stringent reporting obligations on German taxpayers with foreign financial interests and financial institutions managing foreign investment structures for their clients. If the bill is approved by parliament, the changes will be introduced on 1 January 2018.

Under the proposals, taxpayers must disclose a stake of 10% or more in an entity that is located outside the European Union and European Free Trade Association area, or a stake worth at least €150,000, irrespective of whether the participation is held directly or indirectly. Failure to report such “business relationships” could be punishable by fines of up to €25,000.

The draft legislation also places an obligation on financial institutions to report 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 €50,000. The financial institution would also be liable for any tax shortfalls resulting from an omission.

The bill further standardises reporting obligations for direct and indirect holdings in foreign entities and synchronises 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.

The parliamentary legislative procedure will start with an initial consultation on the draft law by the Upper House of Parliament on 10 February 2017. The cabinet also announced that Germany is to sign the multilateral instrument to align bilateral tax treaties swiftly and consistently with the OECD’s BEPS recommendations.