International Exchange of Information for Tax Purposes pursuant to CRS and FATCA

Provisions and consequences of the Law on the Automatic Exchange of Financial Account Information

The Law on the Automatic Exchange of Information regarding Financial Accounts in Tax Matters (Law on Exchange of Financial Account Information, “FKAustG”) is intended to combat border-crossing tax evasion. It constitutes the legal basis for the automatic exchange of information and governs the content of the reporting requirements regarding financial assets in tax matters. Information was first transferred in 2017 for the 2016 calendar year. FKAustG is designed to transpose the Common Reporting Standard (CRS) into national law.

I. Importance and applicability of CRS and FATCA

The Common Reporting Standard (CRS) is part of the OECD Standard for the Automatic Exchange of Financial Account Information and also defines which agencies might have to establish information regarding which accounts. The financial institutes of the countries taking part have to comply with this standard in order to identify their foreign customers liable to taxation and to collect, as well as report, customer and account information. The CRS took effect in the 28 EU member states (except Austria where it took effect on 1^st January 2017) on 1^st January 2016 through the EU Directive on administrative assistance (directive 2011/16/EU) and it, hence, constitutes binding European law. By now, more than 100 partner states (as of Feb. 2018) [link to our AIA contribution including a list of the states taking part] have signed the multilateral agreement. In addition to the 28 EU member states, the following countries take part (among others): Australia, the Bahamas, Barbados, British Virgin Islands, Cayman Islands, Chile, China, Gibraltar, Canary Islands, Liechtenstein, Monaco, Panama and Switzerland.

The Foreign Account Tax Compliance Act (FATCA) governs the exchange of information with the USA regarding financial accounts and was concluded between Germany and the USA in 2013.
On 01/02/2017, the German Federal Ministry of Finance (BMF) published a letter regarding questions of application in connection with the CRS as well as the FATCA agreement (IV B 6 – S 1315/13/10021 :044) (Please add link to the BMF letter). As a result, the FATCA agreement is applicable to account connections between Germany and the USA. The CRS applies to account connections with its partner states. FKAustG constitutes the national CRS implementation law. As a result, financial institutes based in Germany have to comply with the provisions of FKAustG, in principle, while the implementation law of the respective country applies to financial institutes in other countries. In the event that there is no implementation law in other countries or that such a law deviates from the provisions of CRS, the CRS constitutes higher ranking law at the level of the EU states because of the inclusion in the EU Directive on administrative assistance and it is, hence, material.

II. Provisions of FKAustG

1. Procedure

In Germany, responsibility for the international exchange of information in tax matters rests with the Federal Central Tax Office (BZSt), which both transmits the data submitted to it by the financial institutes to the respective competent authority of the other state by 30^th September of the respective next year and receives data from the competent authority of other states and forwards such data to the state fiscal authorities and, primarily, to the competent local tax offices of the banking customers for the execution of the taxation procedure. The data transmitted are saved and retained over a period of 15 (!) years.

In order to combat tax evasion, the German financial institutes which are subject to a reporting requirement began collecting the data listed in FKAustG for every reportable account at the beginning of 2016 and forward these data to BZSt in accordance with the official, required dataset by 31^st July of the respective following year. 

2. Who has to report?

Reporting German financial institutes (art. 19 no. 1-17 FKAustG) are: 

• financial institutes based in Germany - however, excluding their branch offices abroad (these are governed by the respective foreign laws),

• as well as the German branch offices of a financial institute based abroad.

This includes 

• custodial institutions (e.g. depositary banks, securities depositories),

• deposit acceptors (e.g. banks and savings banks),

• investment companies (e.g. asset managers, securities traders) and

• specified insurance companies (e.g. insurance companies selling life assurances).

Non-reporting financial institutes are those financial institutes which have a low risk of tax evasion, for example:

• a state entity, an international organisation or a central bank or the like unless this concerns payments originating from an obligation in connection with commercial financial activities;

• pension funds;

• pension funds of a state entity, an international organisation or a central bank or the like,

• trusts in as far as the trustee of the trust is a reporting financial institute and reports all data to be reported on all reportable accounts of the trust.

3. What is reported and what is not reported? 

Certain information (see below) has to be reported for every reportable account and every person subject to a reporting requirement.

According to art. 19 no. 36 and 37 FKAustG, the following are defined as persons subject to a reporting requirement: Natural persons or legal entities which, according to the taxation legislation of any other state subject to a reporting requirement but that are not a

• corporation (or a corporation which is an affiliated entity of a corporation) whose shares are regularly traded at securities exchanges,

• a state entity,

• an international organisation,

• a central bank,

• a financial institute.

The financial institutes subject to a reporting requirement must fulfil certain due diligence obligations (art. 9 - 17 FKAustG) in order to determine whether the account holder is a person subject to a reporting requirement, such as e.g. being liable to a self-disclosure upon opening of an account or looking for certain indications in electronic datasets, e.g. for the identification of the account holder, his/her address as well as the existence of a poste restante order. As regards the scope of the due diligence obligations, account holders are classified as to whether accounts are held by natural persons or by legal entities. Furthermore, we differentiate between existing accounts and new accounts.

If, in the performance of these due diligence obligations, it turns out that the account holder is a person subject to a reporting requirement and that, as a result, the account in question is an account subject to a reporting requirement (e.g. deposit accounts such as business or current accounts, savings and fixed-term accounts, custody accounts; in the event of an investment, company equity and debt participations in the financial institute, certain redeemable insurance contracts and pension insurance contracts issued or administrated by a financial institute pursuant to art. 19 no. 18 - 24 FKAustG), the financial institute has to report the following information (art. 8 section 1 FKAustG) to BZSt:

• Name, address and tax identification number

• Date and place of birth

• Tax residence

• Account number

• Name and identification number of the reporting German financial institute

• Account balance or value at the end of the respective calendar year concerned
• In the case of custody accounts
• the respective total gross income from interest, dividends and other income generated using the assets of this account and credited to this account;
• Moreover, the total gross proceeds from the sale or redemption of assets paid into the account (or credited to it) and with regard to which the financial institute operated as a depository, broker, authorised representative or otherwise as a representative of the holder of the account.
• In the case of deposit accounts, the total gross proceeds from interest paid for the account or credited to it.
• With regard to all other accounts, the total gross proceeds paid to the account holder regarding the account (or credited to it) and for which the reporting German financial institute is a debtor. The total of all settlement amounts paid during the reporting period also has to be reported.

Exempted accounts are not reported (section 19 no. 34 FKAustG). Exempted accounts, e.g., include

• pension accounts (under certain preconditions, e.g. if there is an obligation to forward information regarding the account to the fiscal authorities),
• accounts whose annual amounts are limited to, at a maximum, USD 50,000.
• life insurance contracts with a term of insurance ending before the natural person insured reaches 90 years of age (under certain preconditions, e.g. that the holder of the contract is not a remunerated buyer),
• accounts whose exclusive holder is an estate, provided the documents regarding this account include a copy of the testament or the death certificate of the deceased,
• accounts set up in connection with a court order; accounts set up in connection with the sale, exchange or letting of real or movable property (under certain preconditions),
• deposit accounts, provided these were exclusively set up because a customer made excess payments which were not remitted back to the customer forthwith,
• other accounts which have a low risk of being misused for tax evasion purposes and which are comparable with the accounts referred to above.

Because of the comprehensive provisions in FKAustG and exceptions to this, each individual case has to be reviewed. Moreover, based on the above explanations, a potential priority of the provisions of CRS or FATCA has to be carefully examined.

Basic rights issues in connection with the automatic exchange of information under CRS and FATCA

There are significant concerns as to whether the transfer of account data for tax purposes introduced in German law, e.g., by FKAustG is compatible with German constitutional law and, in particular, with the basic rights.

• First of all, we cannot see which legal consequences might be involved for an account holder providing his tax ID number upon opening an account.
• Moreover, it is often not clear for the account holder which foreign jurisdiction and authority his/her data should be transferred to - and obtaining such knowledge may involve significant effort for the account holder.
• The obligation to forward personal data or the subsequent forwarding to the respective national and international tax authorities resulting from it violates the right to informational self-determination according to art. 2 I in conjunction with art. 1 I GG [German Basic Law]. This intervention is partly justified by the requirement of ensuring uniformity of taxation and effective prosecution of tax offences. However, forwarding of data regarding those types of income which are not subject to taxation in the receiving country is obviously unlawful.

Notes by LHP Attorneys and Tax Advisers 

The automatic exchange of information is rightly referred to as a turning point in fighting tax evasion in connection with foreign financial investments. LHP Attorneys Tax Advisers have more than 20 years of experience in connection with contentious tax proceedings and criminal tax law investigations.

As a highly specialised tax consultancy, the issues of the automatic exchange of information and defending our clients in this field are part of our day-to-day business. Our attorneys, tax advisers and tax law experts who have double qualifications safeguard and exercise our clients’ rights and ensure that the balance of powers between the state and the taxpayer is equitable.

We are pleased to arrange an initial consultation without commitment. To arrange an appointment contact us at +49 221 39 09 770.