German tax change: What do recruiters need to know?

German tax change recruiters

12th May 2020

As the largest economy in Europe, Germany has historically been a contracting hotspot. With the country handling the coronavirus better than most, the nation is now in a period of reducing the lockdown and attempting to get the economy back up and running.

While it may be some time until the country is back to normal, contractors and recruiters looking to do business in the region should make sure that they do not become complacent over compliance. In the years prior to COVID-19, Germany has been very active as part of the international crackdown on tax evasion, with Germany’s Finance Minister Olaf Scholz one of the key figures proposing a ‘worldwide minimum’ corporate tax rate for non-compliant multinationals.

This month, news emerged about a corporate tax law that could lead to a fundamental change in the compliance landscape in Germany. In fact, those in breach of the legislation could potentially be fined up to 10% of overall company turnover. Here’s what recruiters that place international contractors need to know about the German tax change.

German tax change: ‘fundamental shift’ for recruiters

In May 2020, the Federal Ministry of Justice and Consumer Protection (BMJV) published a draft bill on strengthening integrity in business. The bill is intended to increase penalties for corporate tax crime and create new incentives for compliance. It introduces penalties of up to 10% of the average annual group turnover for companies with yearly income of more than €100 million.

For companies with a lower annual turnover penalties could amount to €10 million. The corporation’s efforts to detect the crime and compensate for the damage can reduce the sanction. Compliance measures taken to prevent and detect criminal offences in the future can also reduce the sanction.

“The law will lead to a fundamental shift in the compliance landscape and the compliance measures to be taken for all companies with subsidiaries, headquarters or business activities in Germany,” said Eike W. Grunert, a compliance expert at Pinsent Masons.

Prior to the law, companies could only be punished with a fine under the Administrative Offences Act for offences committed by employees. The limit is €10 million regardless of the size of the company or its turnover. However, critics say that ‘this does not allow an adequate response to corporate crime.’

According to the BMJV, the aim of the new law is “to put the sanctioning of profit-driven corporations on an independent legal basis, to subject them to the principle of legality and to enable appropriate sanctioning of corporate crimes by means of improved instruments.”

The draft provides for two types of sanctions: a warning, and a penalty of up to 10% of the average annual turnover or up to €10 million for companies with an annual turnover of less than €100 million.  The draft bill obliges courts to take into account the degree to which a company cooperated through internal investigations.

Continued crackdown

This tax change is just another step in Germany’s history of cracking down on tax and compliance. Here’s some of the recent moves the nation has taken that recruiters should be aware of:

  • Germany has conducted a number of high-profile legal cases against those suspected of tax evasion. One of these involves two British investment bankers who are accused of helping engineer dubious transactions that resulted in billions of pounds of losses. Accusations centre on cum-ex trading schemes that the bankers were involved in from 2006 to 2011.  Across Europe, the tax losses caused by cum-ex deals in general was calculated to be €55 billion over the 5 year period.
  • In June 2019, police and tax inspectors in Germany raided the offices and homes of dozens of banks, financial advisers and wealthy individuals as part of a criminal probe into suspected tax evasion. The action, which involved around 110 investigators, was a follow-up on a police raid last November of Deutsche Bank over money laundering allegations linked to the Panama Papers.
  • In Germany, UBS is facing a fine of €83 million for helping clients evade taxes in the period from 2001 – 2012. Investigations into UBS have been ongoing since 2012, and have been particularly intense, with prosecutors conducting raids on the homes of its employees. Authorities have claimed to have a mountain of evidence against the bank and described the fine as appropriate and proportional.
  • Germany has also been one of the leading forces pushing for a compulsory digital sales tax on tech giants such as Facebook, Amazon and Netflix, and late last year, Finance Minister Olaf Scholz suggested cracking down on non-compliant multinationals by instituting a ‘worldwide minimum’ corporate tax rate.
  • On a slightly stranger note, German tax authorities came under fire in 2018 after seizing a family’s pet dog to cover unpaid taxes – showing the extreme lengths that they are prepared to go to collect lost revenue!

Compliance is key

Despite the current situation with COVID-19 taking up much of everyone’s attention, recruiters looking to place contractors abroad should remember that compliance is key. The German government’s strong stance towards tax acquiescence has not changed in light of the pandemic, and if this tax change is anything to go by, the nation is further strengthening its systems.

With this ever-changing compliance landscape, it can be difficult for recruiters placing contractors across the globe to truly understand their legal requirements. As rules vary from country to country, it can be a real minefield to navigate.

At 6CATS International we have a wealth of experience in international contractor management solutions, so why not let us handle this complex job and free up your time to do what you do best?

As the world emerges from the current pandemic, and various hotspots begin opening up for business, in order to take advantage of increased demand, having a compliance expert in your corner could prove to be an invaluable step.

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