Increased disclosure requirements – increased sanctions

Implications for businesses, financial institutions and individuals

I. Some of the main changes at a glance

Current legislative procedures provide for changes to the following topics:

• Notification/reporting obligation of controlling interests in Germany and abroad
• Abolition of fiscal banking secrecy
• Reporting obligations for domestic and foreign financial institutions
• Expansion of the catalog for particularly serious tax evasion and extension of the statute of limitationsIn April 2016, a database became public in which the names, addresses and some shareholders of thousands of domiciliary companies were listed. The publication took place under the heading “Panama Papers”.

II. Government Draft of the Anti-Tax Avoidance Act (StUmgBG)

Against this backdrop, on December 21, 2016, the German government launched another draft law to combat tax avoidance (StUmgBG).

The StUmgBG is intended in particular to create transparency regarding “controlling” business relationships of domestic taxpayers with partnerships, corporations, associations of persons or estates with their registered office or management outside the EU and the EEA (so-called “third-country companies”). The new regulations are intended to have a preventive effect, as the changes are accompanied by an increased risk of discovery for facts previously concealed from the tax office as well as stricter sanctions.

However, the changes do not only affect so-called letterbox companies or domiciliary companies, but all third-country companies. This means that international group structures of operating companies or international asset structures used by companies or foundations are also affected.

Current status in the legislative process

On April 27, 2017, the Bundestag passed the StUmgBG in second and third reading in accordance with the recommendations of the Finance Committee of April 26, 2017 on the government draft of December 21, 2016. The law is thus expected to go into effect this summer.

Amendments to the German Fiscal Code (AO)

a) Duty of disclosure for controlling shareholders of a “third country company

According to Sec. 138 AO-E, taxpayers will in future have to report shareholdings in “third-country companies” that they directly or indirectly control. This obligation applies regardless of whether the taxpayer has a formal interest in the company or not (taxpayers who exercise a controlling or determining influence over the corporate, business or financial affairs of a third country company).

Existing shareholdings that continue beyond January 1, 2018 must also be reported to the tax office with the 2017 tax return, but no later than April 2019.

The duty of disclosure already existing under current law pursuant to Sec. 138 para. 2 sentence 1 no. 3 AO on the acquisition of qualifying shareholdings is to apply in future not only to direct but also to indirect shareholdings.

In the future, the sale of corresponding shareholdings must also be disclosed.

Violations are to be punished with a fine of up to € 25,000.

Taxpayers who exercise a controlling or determining influence over the corporate, business or financial affairs of a third-country company will also be subject to a six-year document retention obligation under Sec. 147a AO-E. This could have the consequence that, in the future, taxpayers with controlling relationships with “third country companies” will be subject to external audits to verify these documents without further justification.

b) Notification obligation of financial institutions

In addition, a notification requirement for domestic financial institutions is to be introduced. Pursuant to Sec. 138b AO-E, the tax authorities must be notified within a certain period of time of any business relationships established or mediated by them between domestic taxpayers and third-country companies.

Violations are to be punishable by a fine of up to € 25,000. In the event of a breach of duty, financial institutions should also be liable for the tax lost as a result.

Correspondingly, under the agreement on the automatic exchange of information (AEOI), in which more than 50 countries in addition to Germany participate, credit institutions in the participating countries are required to disclose business relationships with foreigners.

c) Expansion of the catalog for particularly serious tax evasion and extension of the limitation period

Tax evasion through hidden business relations with third-country companies controlled by the taxpayer is to be included in the list of particularly serious tax evasion.

This extends the criminal statute of limitations for this to 10 years.

According to § 170 para. 7 AO-E, the statute of limitations for tax assessment begins at the earliest after the tax office becomes aware of such facts or at the latest ten years after the end of the year in which the tax arose.

As a result, in the case of taxable income related to relations with a third country company, the statute of limitations for tax assessment may extend to a period of more than twenty years in the worst case. This applies to all assessment periods beginning after December 31, 2017.

d) Other changes

According to Section 228 AO-E, the period of limitation for payment is to be generally extended from five to ten years in cases of tax evasion.

In addition, the fiscal banking secrecy pursuant to Section 30a of the German Fiscal Code (AO) is to be lifted. Tax authorities can thus query accounts of taxpayers without the previous investigation restrictions.

This is to be done in accordance with sec. 93 para. 1a AO-E will be accompanied by the explicit authorization for collective information requests for domestic or foreign facts.

In the future, credit institutions will also have to record the tax identification of the account holder or the authorized signatories and beneficial owners in accordance with Section 154 AO-E.

At the same time, the account retrieval procedure is to be extended for the financial administration of the federal states in accordance with Section 93b AO-E with regard to this data. This enables tax offices to determine who is the rightful owner or beneficial owner.

The period within which credit institutions must retain data for account retrieval when an account is closed is to be extended to 10 years.

Scope of application

The amended procedural provisions are, with exceptions, some of which have been mentioned above, to be applied in principle to all proceedings still pending when the provisions of the StUmgBG come into force.

III. Amendment of the Money Laundering Act (GwG) by the Implementation Act of the 4th EU Money Laundering Directive

In parallel to the amendments made by the StUmgBG, on May 18, 2017, the Bundestag adopted the German government’s draft of a law implementing the 4th EU Money Laundering Directive (RL(EU) 2015/849). Among other things, this implementation increases the transparency obligations for entrepreneurs (introduction of a so-called “transparency register”) and tightens the associated fine provisions.

The new GWG is scheduled to enter into force on June 26, 2017.

Obligation to Report the Beneficial Owners of Legal Entities and Registered Partnerships Subject to Fines

With the entry into force of the new AMLA, all domestic legal entities and registered partnerships are required to provide information on the beneficial owner for entry in the transparency register by October 1, 2017.

Shareholders who are beneficial owners or who are directly controlled by the beneficial owner have the mirror-image obligation to notify the Company without delay of the information required to fulfill the reporting obligations and of any changes to this information.

Violations can be punished with fines of up to EUR 100,000 in the case of serious, repeated or systematic violations of up to EUR 1 million.

Notification obligation also applies to control mediating agreements

Compared to the regulations that have applied to date, the obligation to report has a particularly explosive effect because, for example, agreements that mediate control must also be reported to the transparency register. This includes in particular voting trust, syndicate and pool agreements.

Transparency register possibly open to public inspection

The adopted draft law does stipulate that the transparency register is not open to public inspection, but that there must be a legitimate interest in obtaining information. In principle, however, anyone who can credibly demonstrate such a justified interest is entitled to inspection rights. The transparency register is intended precisely to help the business community identify the beneficial owner of a potential contractual partner. In addition, the committees of the EU Parliament have already launched another directive initiative with the decision of February 28, 2017, which seeks public insight into the registers and the abolition of the restriction to a legitimate interest. The Bundesrat expressed a similar opinion in its statement on the government bill. Therefore, it cannot be ruled out that the transparency register will become publicly accessible at a later date.

For further information in this context, please refer to our February 2017 client information on the topic “
Money laundering at goodwill dealers and new transparency register: implementation of the Fourth Money Laundering Directive
“.

IV. Need for action

Against the backdrop of the planned changes, all affected parties should carefully review in the coming months whether and which information must be provided in connection with third-country companies and domestic corporations. In the event of a notification obligation, the required information must be prepared in a suitable form and reported in due time. We will of course support you in this and will be happy to answer any questions you may have on this subject at any time.