Effects of the planned association sanctions law on criminal tax law

Already today, the imposition of fines on companies is often related to tax crimes and offences. Following the entry into force of the planned Association Sanctions Act, the sanctioning of companies will again increase significantly.

I. Background

The government draft of the Association Sanctions Act (“VerSanG-E”) is currently the talk of the town and is expected to become law this year. It places the sanctioning of associations for crimes committed from within companies on an independent legal footing.

The impact on companies will be severe:

• The planned introduction of the legality principle, i.e. mandatory prosecution, will lead to a significant increase in investigations and sanctions against companies.
• Sanctions can amount to up to 10% of average Group-wide annual sales.
• Companies will be required to implement (tax) compliance management systems (CMS) or adapt them to the new legal situation in order to exclude sanctions from the outset or to benefit from possible sanction mitigations.

Criminal tax law in particular is already considered a gateway for imposing fines on companies. A large proportion of the fine proceedings brought against companies are based on alleged misconduct in connection with tax offenses.

It is true that the new regulation only applies to (tax) criminal offenses – e.g. (intentional) tax evasion -; for (tax) administrative offenses – e.g. reckless tax evasion – the corporate fine under administrative offenses law remains in force, the imposition of which is at the discretion of the prosecuting authority. However, conditional intent is sufficient for intentional tax evasion. Practice shows that authorities often very quickly assume at least conditional intent and subsequently initiate corresponding investigative proceedings. It is therefore to be expected that in the future, if a tax offense is suspected, association sanction proceedings will also be initiated against the company.

II. conditions of sanctioning

In order for the association to be sanctioned, there must first be a so-called association act, i.e. a criminal act by which the association’s duties have been violated or by which the association has been enriched.

If the association’s tax obligations are violated, e.g. by deliberately failing to submit tax returns or submitting incorrect tax returns, this also regularly constitutes an act of association, which can lead to the association being sanctioned.

Such an act of association is automatically attributed to the association – i.e. without the possibility of exculpation – if it is committed by a so-called management person (e.g. board of directors, managing director, head of taxes). If, on the other hand, the association act is committed by a so-called non-management person, an association sanction will be imposed if the management persons of the association could have prevented or significantly impeded the association act by taking reasonable precautions (e.g. (tax) compliance measures).

III. Exclusion of sanctioning in case of voluntary disclosure

Pursuant to Section 5 of the VerSanG, an association sanction shall not be imposed if the underlying association offense cannot be prosecuted. In the case of tax evasion, this is the case in particular in the event of an effective voluntary declaration exempting the offence pursuant to Section 371 of the German Fiscal Code (AO).

1. Group of persons to be included

If several (non-) managers commit association offenses (e.g. tax evasion by several managing directors when submitting an incorrect tax return), each of these association offenses can be used as a connecting act for an association sanction. Consequently, all associational offenses must be eliminated through voluntary disclosures in order to avoid a sanction against the company.

This means that all (non-) management persons involved in the association act must file an effective self-disclosure so that a sanction cannot be imposed on the association. Putting this into practice will be a major challenge. If one only considers the now extended prosecution statute of limitations of 15 years for cases of serious tax evasion, the number of possible persons who would have to file a voluntary declaration may be very high.

The association’s own right of self-display has not been provided for to date.

2. Penalty surcharge according to § 398a

Also in cases of voluntary disclosure, in which the prosecution of a tax evasion is only waived by the payment of a penalty surcharge according to § 398a AO, because the evaded tax exceeds EUR 25,000 per act, a sanctioning of the association is ruled out. However, in this case, too, all parties involved in the offense would have to pay the penalty surcharge pursuant to Section 398a AO. There is potential for conflict here if the parties involved make their cooperation in the voluntary disclosure dependent on the association assuming payment of the monetary surcharge in return.

3. Legal consequences of an effective voluntary disclosure

It is true that the voluntary disclosure excludes the imposition of a sanction on the company. If, however, it is a case of an association act by a non-managerial person, there is still the possibility, despite self-disclosure, of imposing a fine on the company under the Administrative Offences Act for a breach of supervisory duty under Sections 130, 30 OWiG.

IV Self-disclosure and internal association investigations

An internal association investigation conducted in accordance with the requirements of the VerSanG-E shall result in a reduction of the sanction to half of the threatened maximum sanction. The following applies to the relationship between a voluntary declaration and an internal association investigation:

If self-disclosure is possible for all association offenses, it will continue to be the means of choice. Self-disclosure means that a sanction cannot be imposed on the association, whereas “only” half of the sanction is reduced in the case of an internal association investigation.

If, on the other hand, an effective self-disclosure is not possible for all association offenses because, for example, participants refuse to cooperate or there are grounds for blocking, an internal association investigation – if necessary in addition to the self-disclosure – can lead to more legal certainty due to the reduction in sanctions that is typical of the association.

V. Importance of a Tax CMS

The stated aim of the VerSanG-E is to create incentives for (tax) compliance measures. Thus, a Tax CMS can exclude a sanction from the outset in the case of an association of a non-managerial person, in that there is already objectively no tax evasion or because the Tax CMS represents an indication against intent or recklessness. Tax CMSs that have already been implemented, but also those that have only been created subsequently, also play a significant role in the type and level of sanctions. Finally, the possibility of discontinuing the sanction proceedings or refraining from prosecution in exchange for conditions and instructions is opened up. The requirement for a functioning tax CMS has thus become even more important as a result of the VerSanG. This also affects small and medium-sized enterprises. Here, however, even a few simple measures can be sufficient.

VI. conclusion

The risk of investigative proceedings being initiated is already very high in the area of criminal tax and regulatory offences law. Following the entry into force of the VerSanG, a significant increase in proceedings can be expected due to the principle of legality.

Companies should therefore use the time until the VerSanG comes into force to adapt their tax CMS to the new requirements. This relates in particular to the definition of internal company processes for dealing with tax misconduct (subsequent compliance), which enable the managing director to make a decision for the good of the company within the short time available after the infringement has been discovered.