Nationwide Raids: Investigative Authorities Target “German Tax Havens”

According to media reports, tax investigators have conducted large-scale searches of business premises and residences in Monheim am Rhein and other municipalities with particularly low trade tax rates. The focus is on companies that are alleged to have relocated their headquarters to so-called “German tax havens” without maintaining an actual place of business there. The allegation is tax evasion through the false representation of a tax residence. Companies based in low-tax jurisdictions should now act quickly and appropriately and should prepare accordingly.

Raids in North Rhine-Westphalia and Bavaria

Press reports describe this as the biggest crackdown on German tax havens in the history of the Federal Republic. The investigation is being led by the newly established Central and Contact Point for the Prosecution of Economic and Financial Crime (Zentral- und Ansprechstelle für die Verfolgung von Wirtschafts- und Finanzkriminalität (Zefin)) at the Düsseldorf Public Prosecutor’s Office. Together with approximately 110 investigators from the State Office for Combating Financial Crime (Landesamt zur Bekämpfung der Finanzkriminalität (LBF NRW)), Zefin carried out searches at numerous locations – particularly in Monheim and Leverkusen, but also in Düsseldorf, Mönchengladbach, and Siegburg, as well as in Bavaria. 

The search operations targeted not only the companies themselves, which the authorities viewed as suspects, but – according to media reports – primarily a service provider that, allegedly knowing that the company’s registered office was only listed there as a front, rented offices to more than 100 companies, thereby enabling them to maintain a fictitious registered office. Law enforcement agencies in North Rhine-Westphalia, in particular, have stepped up their efforts against tax evasion. Last year alone, there were large-scale searches related to allegations of trade tax evasion. Further investigative measures and searches by the aforementioned, newly established, and adequately staffed agencies in the field of economic and financial crime are expected in the future.

Focus on Low Trade Tax Rates

The background to the statewide search operations is an investigation into tax evasion based on inaccurate trade tax returns regarding the so-called “center of business management.” Municipalities such as Monheim am Rhein, Grünwald, and Leverkusen attract companies with exceptionally low trade tax assessment rates. The assessment rate in Monheim is 250 points – significantly below the national average of around 405 points. The tax savings for companies headquartered in these locations are substantial. Tax authorities are now examining whether the reported business locations actually exist or whether they are merely mailbox addresses. The suspicion is directed at companies that do not maintain their own premises, staff, or operational activities at the low-tax location, but instead conduct their actual business operations elsewhere.

Criminal tax law risks associated with incorrect information regarding the permanent establishment

If trade tax was due at a location other than the permanent establishment location stated by the company, the previous trade tax returns may contain incorrect or incomplete information regarding tax-relevant facts within the meaning of Section 370(1)(1) of the German Fiscal Code (AO). Whether and where a permanent establishment exists is determined in accordance with § 12 AO. According to this provision, a permanent establishment is any fixed place of business or facility that serves the activities of the enterprise. In particular, a permanent establishment may also be the location of the management. In determining the location of management, the center of the overall business management must be taken into account (§ 10 AO). The decisive factors here are the actual circumstances and the actual exercise of management activities, not merely a formal registration. The tax authorities rely on indicators such as the lack of dedicated office space, no staff working on-site, the use of coworking spaces or virtual offices without a physical presence, as well as management and operational decisions being made at a different location. Criminal liability for tax evasion requires, in addition to the aforementioned incorrect or incomplete information, that this results in reduced tax payments or the obtaining of unjustified tax advantages (Section 370(1) AO). In the event of a conviction for such tax evasion, fines or imprisonment of up to five years may be imposed; in particularly serious cases, up to ten years (Section 370(1), (3) AO). 

What Companies Should Do Now

Companies based in low-tax jurisdictions should immediately conduct (or have conducted) a tax review to determine whether their permanent establishment structure would withstand scrutiny under tax law or criminal tax law. It is particularly crucial that actual business activity takes place at the reported location – documented by the company’s own premises, on-site staff, and verifiable operational decisions made locally. Those who proactively analyze their own permanent establishment situation and make corrections where necessary can significantly reduce the risk of criminal prosecution. 

Under the conditions of Section 371 of the German Fiscal Code (AO), a voluntary disclosure that exempts one from punishment may also be considered in individual cases – but only as long as the offense has not yet been discovered, for example, through a search and seizure of incriminating documents. Finally, companies should generally – regardless of any justified or unjustified allegations against them – prepare for potential searches, which means establishing guidelines, training employees accordingly, designating an external criminal defense attorney as an emergency contact, and maintaining an appropriate emergency plan. This plan should contain clear instructions for the employees present. In particular, it is essential to remain calm and generally cooperate until a consultant – who should be contacted as soon as possible – arrives on site to constructively assist with the search.