Legal action before the Fiscal Court

Despite surveys by the government showing that every third tax assessment notice is flawed - - which comes as a surprise to a tax lawyer - many cases with good prospects are not litigated. The Fiscal Court Rules and material tax law are intertwined. This means, that legal action before the Fiscal Court demands a highly skilled and experienced tax-lawyer. Only few tax-lawyers and tax advisers have completed the professional eduction that equips them with these special skills. It is because of this lack of procedural knowledge, that many abstain from litigation - even if the prospects are positive.

Before commencing proceedings before the Fiscal Court, the claimant must lodge an objection with the Tax Authority within one month of the tax assessment being issued. If the Tax Authority allows the objection, the tax assessment notice will be varied according to the application by the taxpayer or his representative, and a new tax assessment notice will be issued. If the Tax Authority rejects the objection, it will issue a respective notice of rejection. The taxpayer may then commence legal proceedings against this decision at the Fiscal Court in his jurisdiction.

The statement of claim must be filed within one month after the notice of rejection was issued. The decision by the Fiscal Court is either made by a single judge or a senate of judges; A senate has five sitting judges, two of them are lay judges. After submission of the statement of claim and the exchange of documents outlining the substantiation of the claim, an oral hearing is conducted in most cases. At the beginning of the hearing, the presiding judge or the rapporteur will cite the material statements contained in the case files. Subsequently, applications are made and substantiated, and the disputed matter is argued in respect of the facts and the applicable law. The court will protocol the oral hearing. At the end, the presiding judge declares the oral hearing as concluded and subsequently delivers his judgement. The operative part of the judgement, meaning the decision, must be handed down within two weeks. The court is allowed five months for furnishing its complete rationale for the judgement.

Both the claimant and the respondent may appeal against a judgement by the Fiscal Court to the Federal Fiscal Court (BFH), if the application to appeal is allowed by the Fiscal Court. If the application to allow the appeal is rejected by the Fiscal Court, a complaint may be lodged with the Federal Fiscal Court. An appeal or a complaint against the decision not to allow the appeal must be submitted in writing to the BFH within one month of the complete judgement being handed down. An appeal will only be admitted where, the case bears general significance for the interpretation of the law, for ascertaining a consistent application of the law or, in the case a formal deficiency, or where a judge erred in decision-relevant aspects of the case. The appeal will only examine the application of the law by the Fiscal Court, a re-assessment of the factual circumstances will not be performed.

Contrary to the objection proceedings, litigation proceedings before the Fiscal Court are subject to fees. In addition to the costs of legal representation, court fees (levies and disbursements) are payable.

The court costs are determined by the amount in dispute. This is usually the difference between the assessed tax amount and the amount of taxes claimed payable by the claimant. In the case of income tax, the solidarity surcharge and church tax are excluded. In the case of an assessment notice for a uniform and separate determination of profits, the rule of thumb is, that the amount in dispute is set at 25% of the disputed profits. The minimum amount in dispute is € 1,000.

The court fee for a case being litigated before the Fiscal Court is €784 for an amount in dispute of €10,000. An amount in dispute of €100,000 entails court fees of €3,424 and reaches €17,824 for an amount in dispute of €1 Million. These procedural costs are reduced by half, if the claim is withdrawn prior to the conclusion of the oral hearing, or if the case was settled.

The claimant must pay a provisional court fee of € 220, which is later credited towards the final amount of court fees. The final amount of court fees payable is determined by the Fiscal Court after the litigation has concluded. If the claimant is successful, the Tax Authority is liable for his legal costs (RVG applies) and court fees; if he is unsuccessful, he is liable to pay these costs himself. If the taxpayer is partially successful, the costs will be split between him and the Tax Authority.

• Substantial and tested knowledge of the tax law
• Strong procedural knowledge and
• experience in dealing with the procedural rules of the Fiscal Court.

Lawyers/tax advisers and their clients frequently fall prey to the pitfalls of litigation before the Fiscal Courts. Minuscule procedural errors quickly entail dramatic consequences. For these reasons, litigation before the Fiscal Court frequently succumbs before it has even started. More than 40% of the complaints and appeals received by the Federal Fiscal Court are rejected due to serious formal deficiencies.

It is for this reason, that many judgements by the fiscal courts and the Federal Fiscal Court read like a textbook. Each of these cases is a potential case for professional liability, as is the failure to commence litigation in a case with good prospects.

You can avoid mistakes now by instructing one of our tax-lawyers. In many cases, the way to success is paved during the early days of the proceedings.

a. Conformity of objector and claimant
The claimant must have completed objection proceedings prior to lodging his claim. It is therefore important, that in the case of joint taxation of a married couple, both spouses must present as joint objector in the objection proceedings, presupposed that both spouses later wish to jointly litigate their claim.

b. Formal requirements for a statement of claim
The statement of claim must be submitted in writing. This means, that the taxpayer, or his representative, must sign the statement of claim. The statement of claim must clearly designate the claimant, the respondent, the subject matter of the claim and, in the case of an appeal, also designate the administrative measure and the judicial decision appealed against. It must spell out the relief sought and the facts and evidence serving for the substantiation of the claim.

c. Application for a stay of enforcement initially to be submitted to the Tax Authority
An application for a stay of execution, which means that the tax liability remains unpaid while the proceedings are on foot, will only be admitted to proceed before the Fiscal Court, if the Tax Authority has previously refused to admit the respective application. If objection proceedings have resulted in the Tax Authority granting a stay of execution, which expires once a decision is handed down in the objection proceedings, a farther application has to be made to the Tax Authority in respect of the legal proceedings before the Fiscal Court.

d. Relationship between assessment notice for a tax base and a subsequent assessment notice.
If assessment notices are challenged, it is important to be aware of the relationship between assessment notices for tax bases and subsequent assessment notices. Determinations in assessment notices for tax bases, e.g. an assessment notice for profits, may only be contested by challenging that particular notice, not by challenging subsequent notices, e.g. a resultant income tax assessment.

e. Application to admit evidence
Applications for the admission of evidence are a particular pitfall in litigation before the Fiscal Court. Applications for the admission of evidence must, in as far as the evidence is sought to be considered by the court, be re-iterated during the oral hearing, even if the evidence was already proffered in a document. If the court abstains from admitting evidence, this must be objected by the taxpayer or his representative and the objection must be recorded in the hearing protocol.

It is easy to measure the success of litigation before the Fiscal Court. The proceedings were successful, if the reduction of the tax load is greater than the litigation costs. The court fees are relatively low and the cost of legal advice by an lawyer is, depending on the individual case, tax-deductible. Only a small proportion of the court fees must be paid upfront. The greatest part is payable at the conclusion of the proceedings, but only if the case was unsuccessful. It is also noted, that courts are not permitted to change tax assessments to the detriment of the client. It follows that the risk is somewhat limited.