Ruling of the Federal Fiscal Court (BFH) on December 20, 2023, Ref.: I R 21/21
A tax audit for persons with limited tax liability can only be ordered by the tax office and not by the Federal Central Tax Office (BZSt). This was clarified by the Federal Fiscal Court (BFH) in its ruling on December 20, 2023 (Ref. I R 21/21).
Persons who earn income in Germany but do not have a residence or habitual abode in Germany are considered to be limited tax liable. Only the income generated in Germany is taxed, whereas the income generated in other countries is not, according to the law firm MTR Legal Rechtsanwälte, which also advises on German and international tax law.
The tax on limited tax liable persons is collected by the Federal Central Tax Office (BZSt). However, the BZSt is not responsible for ordering an external tax audit for limited tax liable persons, which may include artists residing abroad, to check the proper payment of taxes. This responsibility falls within the purview of the tax office, as clarified by the Federal Fiscal Court in its decision on December 20, 2023, defining the jurisdiction of the authorities.
Tax Audit at a Concert Management Company
The BFH’s decision was prompted by a tax audit of a partnership that operates a concert management company in Germany and organizes an annual music festival. Foreign artists regularly perform at this festival. The fees that these foreign artists receive for their performances are subject to taxation in Germany.
The income tax on these fees is levied through the so-called tax deduction according to Section 50a (1) No. 1 or No. 2 of the German Income Tax Act (EStG). In practice, this means that the concert management company withholds a certain percentage of the fee and remits this amount directly to the German tax authorities. The concert management company also proceeded in this manner and sent corresponding reports to the BZSt, which is responsible for collecting the tax.
Income Tax on Fees of Foreign Artists
In February 2020, the tax office responsible for the concert management company ordered a tax audit of the company. The core issue was the payment of income tax on the fees of the foreign artists. The concert management company opposed the audit order. The Lower Saxony Fiscal Court upheld the company’s claim in the first instance, reasoning that it was not the local tax office, but rather the BZSt that was responsible for verifying proper tax deduction as part of an external audit.
The Federal Fiscal Court overturned the judgment of the Lower Saxony Fiscal Court on appeal. The judges in Munich first confirmed that it is the BZSt’s responsibility to carry out the tax deduction procedure in accordance with Section 50a (1) EStG. This also includes the issuance of liability notices, additional tax assessment notices, and their enforcement. However, it is not the BZSt’s task to conduct an external audit.
Tax Audit Falls Under the Responsibility of the Tax Office
An external audit is a special investigative measure that must be carried out strictly according to a formalized procedure and is not part of an assessment or tax deduction procedure. Therefore, the external audit falls under the jurisdiction of the competent tax office, explained the BFH, and dismissed the concert management company’s claim. However, the BZSt is generally entitled to participate in an external audit ordered by the tax office.
During a tax audit or external audit, all types of taxes can be examined. The decision on when a tax audit is carried out is at the discretion of the authority, i.e., the responsible tax office. The results of a tax audit can lead to amended tax assessments and significant back taxes. Taxpayers, however, also have the opportunity to contest additional tax claims.
Estimation and Back Tax Payment
Back tax payments may arise due to unclear or incomplete bookkeeping, as this could entitle the tax office to make estimates, which in turn can lead to substantial back taxes. However, there are limits to such estimates. They must be coherent, economically feasible, and reasonable. If they are exaggerated, affected parties have a good chance of contesting them.
MTR Legal Rechtsanwälte advises in tax law and represents your interests during a tax audit.
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