The German government has initiated draft legislation to prevent the use of “letter box companies in tax havens” to avoid tax.
The draft bill was prompted by the Panama Papers revelations last year and approved by Cabinet on Dec. 21. It imposes reporting obligations on German taxpayers with foreign financial interests and on financial institutions managing foreign investment structures for their clients.
German Finance Minister Wolfgang Schäuble said in a press statement, “Germany is a leader in the fight against tax evasion, tax avoidance and tax structuring. We do not tolerate tax fraud through shell companies in tax havens.”
If the bill becomes law, taxpayers will have report direct and indirect shareholdings of at least 10 percent or 150,000 euros (US$156,800) in companies and funds located outside of the European Union and the European Free Trade Association Area.
Failure to disclose the holdings could attract fines of up to 25,000 euros.
Under the proposal, German taxpayers with a controlling interest in foreign entities have to maintain records for at least six years.
The statute of limitations in tax evasion cases will be extended from five years to 10 years.
The bill also places reporting obligations on financial institutions to inform tax authorities of certain structures used to manage client funds outside of the EU and EFTA area. It also aims to remove bank secrecy in matters of taxation. Currently, German banks are bound by the same confidentiality rules as tax advisers and lawyers.
“Those who invest in shell companies must report it to the tax authorities. Going forward, banks must disclose any business relationships to shell companies they have set up or intermediate,” Mr. Schäuble said. He added that tax authorities will be issued with more extensive investigative powers to create transparency “in the intolerable dark area of tax evasion.”
If approved by parliament, the government plans to introduce the changes on Jan. 1, 2018.
Germany assumed presidency of the G20 group of nations on Dec. 1, 2016 and has pledged to continue the tax transparency agenda previously set by the group. In particular, the German government said, it will be implementing the recommendations for preventing base erosion and profit shifting (BEPS) and encouraging tax compliance by achieving the broadest possible participation in the international exchange of information in tax matters.
Germany aims to ensure that the beneficial owners of investment income can be reliably identified and that international access to information on beneficial owners is further improved.
“We will also be continuing the G20 initiative for greater legal certainty in taxation, which lowers the risk of unwarranted double taxation, thereby boosting international economic activity,” the German finance ministry announced in December.
“We also want to turn our attention to the special requirements for tax administrations in developing countries, and we want to discuss the impact of digitalization on taxation.”