Effective legal protection against enforcement by the Tax Authority

The prerequisites for enforcement are:  

• A valid tax assessment notice (or demand for payment) must be present. A sales tax advance declaration suffices as the legal basis for enforcement, because a tax declaration has the same legal effect as a tax assessment notice. Even an unlawful assessment notice is valid in principle, which means that the notice needs to be contested in order to have it set aside. Without contesting it, even an unlawful notice will only be set aside in exceptional circumstances.
• Enforceability of a tax assessment notice: A tax assessment notice cannot be enforced, if a stay of enforcement was granted. An objection by itself does not lead to a stay of enforcement of a tax assessment notice.
• Due date for tax payment: The due date for payment is prescribed by the respective tax laws and is also noted on the tax assessment notice. A due date may be deferred by way of payment deferral or moratorium.
• Formally proper demand for payment: The Tax Authority must demand payment from the taxpayer (”please pay by...”). This demand for payment is frequently contained in the respective tax assessment notices.
• The Tax Authority must adhere to a period of one week (it commences on the date of the demand for payment).

As tax law specialists and tax advisers, we assist debtors facing tax enforcement by developing and implementing a suitable strategy to deal with the enforcing Tax Authority. It should be differentiated between disputed and undisputed tax assessments.

A. When the tax assessment is disputed

In this case, it must be ascertained that objections are lodged against all tax assessment notices in due time, which means that the tax assessment notices will not become final and thereby irrevocable. However, notices which are issued subject to audit do not need to be objected against in order to be varied at a later time. In the case of an application for a stay of enforcement, however, the objection must also be lodged within the time given.

A factual substantiation of the individual case should be drafted for the purpose of contesting the tax assessment notices by lodging an objection. Following a consultation with our client, our tax law specialists in Cologne can take the necessary action. We commence the respective objection proceedings and litigation before the Fiscal Courts on behalf of our clients.

After ascertaining that objections have been lodged against all enforceable tax assessment notices, it must be decided on a case-by-case basis, if an application for a stay of enforcement should be made to the Tax Authority. This is, because the objection by itself will not lead to a stay of enforcement. As is the case with an objection, an application for stay of enforcement must be adequately substantiated. For the application to be successful, it suffices to subject the tax assessment notice to significant doubts. In addition, in the case of an existential threat, it may be argued that the enforcement is unreasonable.

If the Tax Authority rejects an application for a stay of enforcement despite adequate substantiation, the next step is to make an application for a stay of enforcement to the Fiscal Court. Based on our practical experience in procedural law, our tax law specialists represent clients before the Fiscal Court and the Federal Fiscal Court.

Note by the tax law specialist, tax attorney and tax adviser in Cologne

Contrary to civil claims, applications and legal action before the Fiscal Courts have one significant advantage: The amount of court fees payable to the Fiscal Court is of a rather symbolic amount in relation to the actual tax debt. Additionally, the Fiscal Courts are usually staffed with competent professional judges, who are able and willing to deal with complex matters.

As soon as the application for a stay of enforcement has been submitted to the Fiscal Court, it is an unwritten rule, that the Tax Authority will suspend the enforcement until a decision about the application for a stay of enforcement has been made. In particularly urgent cases, the presiding judge may make a sole decision and request the head of division or director of the Tax Authority to abstain from enforcement measures.

There is, alternative to an application for a stay of enforcement to the Fiscal Court, the option of contesting the refusal of an application for a stay of enforcement by the Tax Authority by way of objection. This objection does however not result in a deferment and it is in most cases foreseeable, that the Tax Authority will arrive at the same decision. This applies, if no significant new submission in respect of the facts or the law is made.

B. If the amount of tax is undisputed

If the company is not able to object against the underlying facts for the demand for payment of taxes, because the tax assessment notices are factually accurate, the last option is to point to a purported unreasonableness of an enforcement. Applicable legal remedies are:

• An application for an interest-free deferment as per § 222 Tax Act (AO)
• An application for protection against enforcement as per § 258 Tax Act (AO)

Such applications should however be discussed with an experienced tax law specialist, because the conditions for approval are very stringent and the application must be prepared thoroughly. The applicant must, for example, make detailed disclose of his current financial and income situation. This might quickly result in boomerang effects, if the Tax Authority utilizes this information to commence insolvency proceedings.  Such an application may aim at repaying the taxes in reasonable instalments. Our tax law specialists in Cologne also represent clients in matters seeking deferment, it must however be observed, that the Tax Authorities have become more stringent in recent years. For this reason, all procedural options should be examined in a face-to-face consultation.

If trade tax is payable, it must be observed that it is enforced by the local revenue and taxation authorities in most federal states. The respective authority should therefore be brought to the table. This can be achieved by transmitting a copy of the application for a stay of enforcement for the trade tax assessment notices to the local authorities via facsimile. As soon as the Tax Authority approves the stay of enforcement for the trade tax assessment notices, the local authority is also obligated to order a stay of enforcement for the trade tax assessment notices.

A frequently contentious issue is the condition of a security deposit imposed by the Tax Authority or the Trade Tax Authority. This means, that a stay of enforcement will only be granted under the condition, that a security deposit is provided. A stay of enforcement under such a condition does however not serve the interests of the debtor.

Note: This practice if often unlawful, because the hurdles permitting a demand for a security interest have been set rather high by the Federal Constitutional Court. In the worst case, legal protection must be obtained from the Fiscal Court.

If spouses are assessed jointly, each spouse is severally liable as joint debtor for the tax debts of the other spouse. If one spouse wishes to protect himself/herself against this in enforcement proceedings, he may submit an application for separation of tax affairs. This application will lead to the enforcement being limited to the portion of taxes, which are derived from the income of the applicant.

Note by the tax attorney from Cologne:
This application can only be made after a demand of payment has been received and is not permissible after the tax debt has been paid down.

Clever fiscal officers know how to circumvent such tax separation notices. This is because § 278 Sec 2 Tax Act (AO) stipulates, that a spouse protected by a tax separation notice can still be held liable if he/she has received gifts from the husband and vice versa. The person who received the gift may then still be liable in the amount of the gift. This does however not apply to usual presents (e.g. typical birthday presents, whereby “typical” may be subject to dispute).

Note by the tax attorney from Cologne
The laws pertaining to enforcement contain many pitfalls. It must also be remembered, that certain actions lead to rescission under insolvency law and rescission law. Whether the actual case constitutes such grounds must be clarified on a case-by-case basis, so that all parties know whether there is reason to be concerned or not.

It is not possible for a tax debtor to hide his domestic bank accounts from the Tax Authority. Since 01.04.2005, the Tax Authorities are legally and technically in a position to identify all German accounts and their authorized signatories based on the data which the banks must provide under law.

Because banking documents are stored for at least ten years, the tax authorities may also track assets that have been transferred to foreign countries. The Tax Authority may, under certain circumstances, be able to retrieve these transferred assets back to Germany by way of administrative assistance rendered by foreign authorities. It is also noted, that a transfer of assets while enforcement proceedings are pending may be a criminal offence and the laws pertaining to rescission may apply for the benefit of the Tax Authority.

Our tax law specialists in Cologne regularly advise clients, that the Tax Authority may request the Passport Authority to cancel a passport, if there are indications that a citizen wishes to escape the enforcement of tax debt by fleeing to a foreign country. This should effectively prevent a debtor to escape and disappear to a foreign country.

If the debtor is already in a foreign country, the Tax Authority may force a debtor to return to Germany: By cancelling the passport on request of the Tax Authority, the debtor is forced to return to Germany if a valid passport is required for his residence permit in the foreign country.