Association Sanctions Act (VerSanG)

Tax evasion would be a criminal association offence. “Association” according to the VerSanG means companies, except non-profit organizations. Thus, media coverage often refer to this draft bill as “corporate criminal law”. The internal investigation would raise a large number of unresolved practical questions for simple correction cases (sec. 153 AO German General Fiscal Code – hereinafter: AO) and criminal tax investigation cases. Acknowledging the voluntary self-disclosure exempting from criminal punishment in the association sanction proceeding would intensify existing practical problems of the current disclosure rules. Together with the current tightening of (tax) criminal law (extension of limitation period for criminal prosecution, extension of criminal confiscation) a significantly tightened legal situation in Germany would arise. A formal request of the German liberal party in the German federal parliament dated February 2021 specifically asking for the consequences of the draft bill for German tax law and German tax criminal law demonstrates the specific relevance of the draft bill for German tax criminal law.

In detail:
 

I. Tax offence as “direct” criminal association offence

The intentional tax understatement, so-called tax evasion, is a criminal association offence, if taxes of the association are affected. Under certain conditions, this also applies to foreign (tax) offences. In the event of intentional criminal association offences, the planned association monetary penalty will be (i) up to EUR 10 million (sec. 9 para 1 no. 1 draft VerSanG) or (ii) up to 10% of the average annual turnover, if the association had an average annual turnover of more than EUR 100 million (sec. 9 para. 2 no. 1 draft VerSanG). In the case of several offences an overall penalty is applied, which may not exceed twice the maximum amount provided for the individual sanction (sec. 20 para. 2 sent. 4 draft VerSanG). This would result in a maximum total penalty of EUR 20 million or 20% average annual turnover.

The draft VerSanG is not an association criminal law. However, regarding its practical consequences for associations, it would have core features of such an association criminal law. Thus, the word ‘criminal’ will be used hereinafter (e.g. criminal association offence).

II. Tax offence as “indirect” criminal association offence

The intentional violation of the notification and correction obligation without undue delay (sec. 153 AO) constitutes a tax evasion by omission by omission by the obliged individuals. These individuals primarily are legal representatives (e.g. managing directors) – even if they were in good faith regarding the affected tax returns of the association or if they became representatives only after the submission of the affected tax returns! In this case, too, there is a criminal association offence, which leads to the sanctioning of the association.

III. Internal investigations

According to the draft bill, internal investigations can only halve the maximum association's monetary sanction, especially if the association or the third party commissioned by the association contribute significantly to the detection of the criminal association offence and responsibility and cooperate uninterruptedly and unrestrictedly with the prosecution authorities. This gives rise to two special features of German tax criminal law:

1. Simple correction cases

Due to the above-mentioned notification and correction obligation (sec. 153 AO), corporate executives, employees and external advisors should be aware of certain points in the case of tax-relevant doubt issues surface. Possibly, the additional requirements of the voluntary self-disclosure exempting from criminal punishment (sec. 371, 398a AO) must be observed. It should also be noted that this simple tax correction project could "transform" into an internal association investigation, which then raises a series of practical follow-up questions (excerpt):

• When does the association have to disclose itself to which authority and how?
• Is this timetable in line with the requirement of sec. 153 AO (without undue delay)?
• What should be considered when interviewing employees about the cause of the error?
• How does all this have to be documented?
• How do voluntary self-disclosure and internal investigation compare: May the investigation wait until the effectiveness of the voluntary self-disclosure is clarified?
• And what should the association do resp. what may it be required to do, if it or its external advisor discovers that the voluntary self-disclosure is incomplete in terms of personnel, time or content?
• Does uninterrupted and unrestricted cooperation also mean that the association must make an advance payment without undue delay on the expected additional tax burden?    

2. Tax criminal investigation cases

For example in a corruption case committed by an employee, it may be regularly the case that the association, its external advisor and the law enforcement authorities proceed jointly vis-a-vis the employee.

In tax investigation cases, however, the interests of the prosecution authorities (i.e. usually the investigation departments of the fiscal authorities) and the association are not necessarily that identical:

If the association or its external advisor discuss with the tax investigation department regarding facts for a tax estimate (tax assessment proceeding) to conclude an agreement on the facts and its treatment in the sanctioning proceeding, the association would constantly be confronted with alleged obstruction of the investigation.

IV. Voluntary self-disclosure

Sec. 5 no. 1 of the draft VerSanG links the sanctioning of associations with the voluntary self-disclosure exempting from criminal punishment. This link transfers the already existing application risks of the voluntary self-disclosure in corporate cases into the draft VerSanG and in some cases further aggravates these application risks:

1. Multiple responsible individuals

Tax violations in associations often concern ongoing matters (e.g. in the areas of VAT and/or wage tax) and go back years. Corporate executives and employees have changed frequently over these years. In practice, this regularly results in completely different risk profiles for criminal tax law purposes, which should be detected and examined in each individual case.

From the point of view of the association, the entire participation of all (former) executive board members or managing directors in the voluntary self-disclosure is usually recommendeable to reduce association sanction risks under the present sanctioning rules. However, their inclusion makes the preparation of voluntary self-disclosure more complex and can even jeopardize it in individual cases. In the future, under the VerSanG, it would be expected that the prosecution authorities would carefully examine the voluntary self-disclosure to determine whether all those former responsible individuals participate, as well. In the run-up to the submission of simple corrections (sec. 153 AO) or voluntary self-disclosures, the questions will therefore even more arise, to what extent the "protective shield" – "only" as a precautious, prudent measure (preventively) – is stretched and whether this is done openly or covertly vis-a-vis the authority.    

The draft VerSanG intensifies this conflict of interests. In addition to the (former) corporate executives and employees, who face the risk of criminal punishment for tax evasion, the association itself becomes a ‘3rd party’, which faces an association sanction for the tax evasion of the aforementioned individuals. The association gets caught between the ‘fronts’.

2.        Multiple “surcharge”

Sec. 5 no. 1 draft VerSanG also incorporates the following problem of the voluntary self-disclosure:

The voluntary self-disclosure exempting from criminal punishment is principally barred, i.e. does not exempt from criminal punishment, if the understated tax exceeds EUR 25,000 per criminal offence. This is a regular case for associations, because tax understatements in a corporate context are regularly about higher amounts. In these cases, the abandonment of prosecution in accordance with sec. 398a AO remains the only way out for the (former) corporate executives and employees. This requires the payment of a sum of money:

• 10% if the evasion amount is less than/equals EUR 100,000,
• 15% if the evasion amount is greater than EUR 100,000 and less than/equals EUR 1,000,000,
• 20% if the evasion amount is greater than EUR 1,000,000.

This mechanism should also apply to procedures under the VerSanG. This means that associations would also be protected from a sanction under the VerSanG if the conditions laid down in section 398a AO are met. This sounds good at first, but: According to the authoritative view, the conditions laid down in section 398a AO are only met if: every offender has paid the above-mentioned amount of money, whereby this is required independently whether or not the offender has obtained an individual advantage from this offence. Alternatively, the association would have the possibility to aim for lower payments under sec. 153a German Code on Criminal Procedure to ensure that individual tax criminal proceedings are brought to an end. However, this abandonment of charges does not protect against the association sanction.

V. Current developments in German tax criminal law: Annual Tax Act 2020

The German Annual Tax Act (JStG) 2020 entered into force on 29 December 2020. The JStG 2020 affects the planned VerSanG if the draft bill enters into force in its current form. There would be an impact on the prosecution of criminal association offences (tax evasion) with regard to the statute of limitation regarding criminal prosecution (hereinafter: 1.) and the voluntary self-disclosure exempting from criminal punishment (hereinafter: 2.). In addition, the confiscation must be observed (hereinafter: 3.).

1. Extension of the limitation period for criminal prosecution

Relative deadline

The JStG 2020 increased the relative limitation period for prosecution for cases of particularly serious tax evasion (from 10) to 15 years. This extended period is applicable regarding all tax evasions, which were not yet criminally time-barred on 29 December 2020. The planned link between the limitation period for the association sanctioning with the limitation period for the criminal association offence means that the limitation period for the association sanctioning for particularly serious tax evasion will be 15 years, as well.

Absolute deadline

The so-called German Second Covid19 Tax Assistance Act of June 2020 has already set the absolute limitation period of prosecution for particularly serious tax evasions on the two-and-a-half times of the (relative) limitation period as of 1 July 2020. Therefore, the absolute period of limitation of prosecution for the particularly serious tax evasion extends (from 25) to 37.5 years or, in individual cases, even to a maximum of 42.5 years.

2. Requirement of completeness in case of voluntary self-disclosures exempting from criminal punishment

The aforementioned extension of the limitation period for prosecution to 15 years shall apply to all offences which are not yet time-barred at the time of its entry into force (29 December 2020) under ‘old’ law. This already now means that, in a simplified view, all particularly serious tax evasions accomplished on 30 December 2010 onwards, would have to be observed. All particularly serious tax evasions, which were accomplished earlier, are, in a simplified view (i.e. without suspension or interruption events), already time-barred according to the ‘old’ law. The above-mentioned extension of the limitation period will have full impact on the above-mentioned requirement of timely completeness of the voluntary self-disclosure of the offender in such cases from 29 December 2025 onwards. For the associations another timeline applies: The draft VerSanG is to apply only to criminal association offences committed after its entry into force. If the draft VerSanG came into force in 2023, the above-mentioned extension would affect the above-mentioned completeness requirement of voluntary self-disclosures in particularly serious tax evasion cases and thus the prosecution of the association regarding these criminal association offences (sec. 5 no. 1 draft VerSanG) – in contrast to the prosecution of the offender – probably from 2038 onwards.

3. Extension of criminal confiscation

The JStG 2020 retroactively applies a new confiscation mechanism – the (independent) recovery of amounts, which are already time-barred for tax and criminal prosecution purposes, for at least 30 years – to particularly serious tax evasion on a “large scale” (more than EUR 50,000), section sec. 316 Introduction Act to the German Criminal Code, EGStGB.

The current government draft bill, which also includes the VerSanG, demonstrates that the German legislator is aware of the relevance of the confiscation-mechanism for particularly serious tax evasion on a “large scale” (besides the limitation periods for tax and criminal prosecution purposes) for future sanction proceedings, as well. 

_{Published: February 2021}