German court opinion finds errors interpreting tax law can preclude tax offences

The German Federal Court (Bundesgerichtshof) has confirmed its long-standing legal opinion concerning criminal tax law. Even if all other elements of tax fraud are fulfilled, it does not constitute a criminal offence if fiscal damage was caused by an error in interpreting tax law. An administrative offence could result, however, if the error was negligent.

Lack of intent

Tax fraud can only be committed by individuals, not corporations. However, companies can be fined for administrative offences. When individuals evade taxes in their own favour, they act criminally. This is the same for employees and includes both directors and clerks: they can also commit tax fraud by evading taxes in favour of their employers. On the one hand, tax fraud can be committed through acts, in particular if fiscal authorities are deceived about substantial facts. On the other hand, it can also be committed by omission (e.g. by violating legal information duties such as failing to correct previous errors).

In both cases, tax fraud requires an intentional act or a conscious omission. According to the German Federal Court, there is a lack of intent if the accused falsely believes that he is not evading taxes (e.g. if the individual misapplies tax law and wrongly believes taxation does not result). If the situation has tax consequences, the accused is a victim of a mistake of fact (Tatbestandsirrtum), which amounts to a lack of intent and precludes a criminal offence.

When a mistake of fact occurs it can only be pursued as an administrative offence, which requires at least gross negligence.

Body of evidence

Considerable doubts concerning intent is usually a sufficient defence. Due to the in dubio pro reo principle, the prosecution is obliged to prove the accused's intent. Criminal offences are precluded in nearly every case.

Acts or omissions involving gross negligence constitute an administrative offence at most, and the prosecution has the burden of proof here as well.

What can be done?

A professional tax compliance management system can help eliminate such risks.

If an allegation of tax fraud has already been made, the accused may refute the accusations. It is important to keep a diligent record of the company's decisions and the corresponding information on which they are based to ensure that the prosecution cannot prove intentional behaviour. In this way, as soon as tax-fraud allegations arise, the accused will be able to prove the mistake and, consequently, unintentional behaviour. Keeping proper records is a key to any effective compliance system.

For more information on the German Federal Court's opinion and its implications for your German business, contact your CMS partner or local CMS experts Dr. Björn Demuth and Pascal Hornstein.