Factual Agreements in Tax Law and Criminal Tax Law

A factual agreement is an settlement contract between the responsible Tax Authority and a company or individual taxpayer. The agreement determines, if and how certain circumstances, which are no longer deducible with certainty, have occurred. It is important to note, that an agreement may only be made in respect of factual questions, but not in respect of legal issues. It is not possible to negotiate a certain amount of tax payable. On conclusion of such an agreement, the Tax Authority is prohibited from further investigations and must base their tax assessment on the factual agreement. The Tax Authority must consider the factual agreement in their assessment notices. Vice versa, the company is also legally bound by the agreement. It follows, that a thorough preparation of the agreement in coordination with the client and a legally secure wording must be drafted by a tax law specialist.

Examples of facts: Reasonable amount of a director’s remuneration, useful life of an asset, valuations, calculation variances.

Note by the tax-lawyer and tax adviser: Even in light of the current jurisprudence by the Federal Fiscal Court only allowing for agreements on factual issues, a competent adviser may be able to dress up a legal issue as a factual one. This is mainly a question of crafting the exact wording. Example: Valuation issues, e.g. the value of a building, might be considered legal issues, but if expressed in a certain way, they may come across as factual issues. This is because valuations allow for certain margins.

Benefits of a factual agreement: The investigations are terminated, reducing stress and offering legal certainty. Lengthy litigation before the Fiscal Courts is prevented. The conclusion and contents of such an agreement should however be discussed and considered in a consultation on a case-by-case basis.

For the purpose of securing evidence, factual agreements should only be made in writing. The written form is however not mandatory, which means that advantageous statements made by the Division Manager of the Tax Authority during a final conference might potentially allow for the derivation of legally binding effects for the affected company. This is however an exception to the rule.

The responsible officer of the Tax Authority, usually the manager of the assessment division, must sign the factual agreement. If redress proceedings are pending, this would be the manager of the Tax Authority’s objection division.

Note by the tax-lawyer: Factual agreements which do not comply with the mandatory formal requirements are void and detrimental. The taxpayer has admitted facts which will be difficult to renege in a later trial before the Fiscal Courts. It is for this reason, that our tax law specialists in Cologne place particular emphasis on the implementation of a factual agreement, which provides legal certainty and protects the client from nasty surprises.

A factual agreement may be entered into at any time during the process of assessing of tax base amounts. This includes:

• assessment and determination proceedings
• field audits
• objection proceedings or litigation before the Fiscal Courts
• enforcement or collection proceedings
• criminal tax proceedings

Comment by the tax law specialist: It should be ascertained, that the officer in charge of the respective administrative measure signs the factual agreement. Our tax law specialists in Cologne are former officers of the Tax Authority and know the specific areas of responsibility. A signature by the manager of the Tax Authority’s company tax audit division does not suffice, if this person is not concurrently responsible for the assessment of taxes.

Jurisprudence by the Fiscal Courts allows for factual agreements to be entered into during the course of criminal tax proceedings. Such an agreement is governed by the law pertaining to agreements in criminal matters, § 257c StPO.  It is important to note, that a factual agreement must not be coerced by the pressures exerted in criminal tax proceedings. An agreement under such circumstances would be invalid. This would be the case, if the Tax Authority threatens detrimental ramifications in respect of the criminal proceedings, should the taxpayer refuse to enter into a factual agreement.

The dual authority in the case of pending criminal tax proceedings must also be observed: The factual agreement must be signed not only by the assessment division of the Tax Authority, but also by Authority for Fines and Offences (Straf- und Bußgeldsachenstelle). It should be signed by the responsible division manager. The Authority for Fines and Offences will not be bound by a factual agreement, if it was only signed by the Tax Authority.

Our tax law specialists in Cologne will also clarify which sanctions for tax offences may be considered by the Authority for Fines and Offences or the public prosecutor. The aim is to have the criminal proceedings terminated without causing much commotion. If sanctions are inevitable, an agreement may also be sought with the Authority for Fines and Offences in respect of a possible conclusion of the proceedings. This is however only one option for the client, because cooperation is not mandatory in the defence of a case.

Notes by the defence lawyer: All authorities involved in the matter should consent to a factual agreement, in order to avoid disagreeable additional claims. The Authority for Fines and Offences must therefore be brought to the table in due time. It may otherwise depart from the factual agreement and possibly issue an expensive penalty order, which the client was no longer expecting.

If a “lid” should be put on the criminal proceedings, the new regulation pertaining to plea deals in criminal matters (§§ 160b, 257c StPO) must be observed. The Federal High Court only considers plea deals to be legally binding, if they comply with the conditions set forth by the law. This includes the provision, that a criminal court is not permitted to pledge punishment by penalty points, but is only permitted to offer a penalty within the prescribed range for the offence.

Note by the defence lawyer: The formal requirements set out in §§ 160b, 257c StPO must be complied with at any cost. This is, because if the accused makes concessions without having regard to these provisions, or even confesses the offence, it may lead to a harsh wake-up call when the plea deal is later set aside.

Because a factual agreement is supposed to provide legal certainty, it can only be set aside in exceptional circumstances. The Federal Fiscal Court considers a factual agreement to be invalid in exceptional circumstances where it as successfully been contested on the grounds of fallacy, threat or deceit. If, for example, the Tax Authority has unlawfully threatened to instigate criminal proceedings, this automatically renders the factual agreement invalid by rule of law under § 134 BGB (without having to take any action). To be on the safe side, it is recommended to additionally contest an agreement on the grounds of coercion.

A lapse of purpose occurs less frequently. If the factual agreement contains a package plea deal, the lapse of purpose may lead to the entire package plea deal being rendered invalid. This means, that a package plea deal can be very risky for both sides. Factual agreements should therefore be limited to one single, clearly specified contested issue.