In Germany, tax disputes typically arise where the tax authorities intend, when issuing a tax assessment, to deviate from the information provided by the taxpayer in the tax return. This often occurs as a result of a tax audit, an unannounced cash register inspection, a special VAT audit or other audit measures.

Another common source of tax disputes is the production of estimated tax assessments. These are issued where the taxpayer fails to file a tax return, or files it late.

Delays or substantive errors in tax returns may give rise not only to estimated tax assessments, late-payment surcharges and late-filing penalties, but, in certain circumstances, to criminal charges. Intentional or reckless misstatements, as well as late filing, may lead to allegations of tax evasion under Section 370 of the German Fiscal Code.

In the field of VAT, disputes arise, in particular, because VAT is generally self-assessed through periodic advance VAT returns. VAT disputes commonly concern the requirements for input VAT deduction, which may be denied – eg, where the deduction is not supported by a proper invoice.

From a procedural perspective, a formal tax dispute begins with the filing of an objection against the relevant administrative act. If the objection is unsuccessful, the taxpayer may subsequently bring an action before the Fiscal Court.

VAT is particularly prone to disputes. This is due both to the complexity of the German VAT rules and to the fact that domestic VAT law is heavily shaped by EU law. Cross-border transactions, in particular, often give rise to disputes over the place of supply. The applicable rules differ depending on whether the transaction is B2B or B2C and based on the specific nature of the transaction.

Where German VAT applies, the invoice must, in principle, show German VAT unless an exemption applies. Where the transaction is taxable in another jurisdiction, German VAT must not be shown on the invoice. The party liable for the VAT is a key issue. If the supplier is liable in the place of supply, they must register there for VAT purposes and pay the tax there (exception: the One Stop Shop). If the recipient is liable under the reverse charge mechanism, this must generally be reflected in the invoice. In practice, the reverse charge rules remain a significant source of legal uncertainty and disputes.

Another frequent source of VAT disputes is the application of VAT exemptions, which are often subject to documentary requirements. The standards for satisfying these requirements have been tightened progressively in recent years. In addition, specific rules may result in VAT exemptions, or even the deduction of input VAT, being denied where the relevant documentary requirements have not been fully complied with.

In Germany, the risk of tax disputes can be reduced through early legal analysis, full disclosure of the relevant facts, and proper documentation. Under the German Fiscal Code, taxpayers are required to disclose fully and truthfully all facts relevant to taxation. Tax-relevant matters should therefore be identified before the return is filed, assessed correctly for tax purposes, and documented in a transparent and comprehensible manner. This applies, in particular, to cross-border matters, transfer-pricing issues and complex supply chains for VAT purposes.

In particularly complex or economically significant cases, it may be advisable to engage with the tax authorities at an early stage in order to obtain legal certainty and avoid subsequent disputes. German tax procedural law provides a number of formal instruments for this purpose, including, in particular:

• a factual agreement on questions of fact;
• a binding ruling under Section 89 of the German Fiscal Code in respect of matters not yet realised;
• an advance pricing agreement procedure under Section 89a AO for international transfer pricing matters;
• an international risk assessment procedure under Section 89b AO for multinational enterprise groups; and
• in customs matters, a binding tariff information ruling.

A well-prepared tax audit, supported by a consistent presentation of the facts and the early preparation of the relevant documentation, significantly reduces the potential for conflict. The same applies to an effective Tax Compliance Management System.

This is particularly true in the area of VAT law with regard to intra-Community supplies, where the VAT exemption or the deduction of input VAT is available only if the record-keeping and documentary evidence requirements are satisfied. If the record-keeping and documentary evidence requirements for proving supplies to businesses in other EU Member States are not properly met, this will, in practice, generally result in the subsequent denial of the VAT exemption or the input VAT deduction.

In addition, input VAT deduction or a VAT exemption may also be denied under the abuse-of-law doctrine developed by the Court of Justice of the European Union, as implemented in Germany in Section 25f of the German VAT Act, where a business knew or ought to have known that it was involved in a supply chain affected by VAT fraud. In practice, allegations that a business “ought to have known” frequently affect bona fide businesses too. This makes it all the more important to take the necessary precautions during the business relationship so that it can later be demonstrated that the business did not know, and could not reasonably have been expected to know. The rule is intended to combat abuse. At the same time, however, disputes are almost inevitable, since subjective elements are inherently difficult to prove in practice.

The BEPS recommendations and the anti-avoidance measures derived from EU law have made aggressive tax planning more difficult in Germany, while, at the same time, tending to increase both the number and the complexity of cross-border tax disputes.

Increasing cooperation within the European Union in combating cross-border tax fraud has likewise contributed to a rise in tax disputes and parallel criminal tax proceedings.

Particular mention should be made in this context of the activities of the European Public Prosecutor’s Office (EPPO), which commenced operations in June 2021. In 2025 alone, the EPPO initiated 153 investigations in Germany involving an estimated loss of EUR1.86 billion. The estimated loss associated with its current cases in Germany amounts to EUR5.77 billion. Cross-border administrative cooperation – eg, through the Eurofisc information exchange network – increases the likelihood of detection and facilitates the uncovering of cross-border VAT fraud schemes. Important as this cooperation is, practical experience also shows that its operational implementation is not yet fully mature in every case. Particularly in the area of intra-Community supplies, even bona fide businesses sometimes come under scrutiny by the authorities. Even at the investigation stage, this may result in substantial liquidity pressures – eg, through the denial of input VAT deduction and the withholding of VAT refunds – potentially giving rise to consequences that threaten the very existence of the business.

Where additional tax assessments are issued, the filing of an administrative objection or an action before the Fiscal Court is not contingent upon prior payment of the assessed tax. They may be filed even if the tax has not been paid. However, neither the administrative objection nor the court action has suspensive effect, with the result that the assessed tax remains due and enforceable, notwithstanding the pending proceedings. That said, an application may be made for suspension of enforcement. Such suspension may be made conditional upon the provision of security. To the extent that enforcement is suspended and the legal remedy is ultimately unsuccessful, interest accrues at a rate of 6% per annum. If no application for suspension of enforcement is made and granted, failure to pay may result in late-payment surcharges and enforcement measures.

Tax audits in Germany are generally based on a risk-oriented case election process, supplemented by random selection. However, the details of the risk management system used to choose audit cases are not publicly known, and are deliberately kept confidential by the tax authorities. Large businesses are typically subject to continuous tax audits, whereas medium-sized, small and micro-enterprises are audited only selectively. In practice, loss-making companies and businesses claiming substantial tax refunds are regarded as particularly likely to be audited. In addition, cross-border matters, such as foreign-source investment income, and cash-intensive businesses are a particular focus of tax audits.

In Germany, a tax audit is initiated by way of an audit order, which must be issued within the statutory limitation period for the relevant tax. As a general rule, the assessment period is four years; it is extended to five years in cases of reckless understatement of tax and to ten years in cases of tax evasion. Once the assessment period has expired, additional tax assessments are generally no longer possible, although investigative measures may still be undertaken in individual cases. If the tax audit begins before the expiry of the assessment period, the running of the limitation period is suspended for those taxes covered by the audit that are not yet time-barred, with the result that the tax assessment may still be amended notwithstanding the lapse of time.

As a general rule, tax audits are carried out at the taxpayer’s business premises. If no suitable room for the audit is available there, the audit may also be conducted on the tax authority’s premises. The auditors may request access to electronic data. In particular, the accounting records must be made available electronically in a machine-readable format.

In Germany, tax auditors focus, in particular, on the formal correctness of accounting, data retention and cash management, on the completeness and reliability of the tax documentation, and on other typical areas of substantive tax risk.

Such risk areas arise from the specific features of each type of tax. In the area of VAT, for example, they include the VAT exemption for intra-Community supplies, the reverse charge mechanism, the requirements for input VAT deduction, and anti-abuse provisions (such as Sections 25f and 14c of the German VAT Act).

In practice, simultaneous audits and joint audits are becoming increasingly common. Through information exchange networks, the German authorities are able to obtain audit findings and investigation results from foreign authorities, particularly in areas with potential tax crime exposure.

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During a tax audit, the taxpayer must cooperate with the tax authorities. A central point of contact should be designated for communication with the auditors in order to ensure a consistent and coherent presentation of all information. In advance, appropriate tax compliance systems should ensure that tax-relevant transactions are documented reliably and in accordance with the applicable legal requirements. Tax risks, as well as any related criminal risks, should be identified as early as possible to prepare facts, supporting evidence and legal arguments and, where necessary, to make any required corrections.

In Germany, objection proceedings before the tax authority are, as a general rule, a mandatory prerequisite for proceedings before the Fiscal Court. The objection must be filed with the authority that issued the challenged tax assessment within one month. The grounds for the objection may be submitted at a later stage. Once an objection has been filed, the authority re-examines the case in full. Its review is not limited to the amendments requested by the taxpayer. As a rule, an action before the Fiscal Court is admissible only after the objection proceedings have been concluded; exceptions apply in the case of a leapfrog appeal and an action for failure to act.

By contrast, there are no objection proceedings in criminal tax proceedings or administrative fine proceedings.

In Germany, there is no fixed statutory deadline within which the tax authority must decide on an objection. If the authority remains inactive without sufficient reason, the taxpayer may, as a general rule, bring an action for failure to act before the Fiscal Court after six months. There is no separate hierarchical administrative appeal to a higher authority.

If an objection is filed against a tax assessment and the tax office does not grant the requested relief, the taxpayer may bring an action before the Fiscal Court. An action may also be brought by way of a so-called leapfrog appeal without prior objection proceedings. This is, however, possible only if the tax office agrees.

Jurisdiction lies with the Fiscal Court in whose district the tax office that issued the assessment is located. The action must be filed within one month of service of the objection decision. For several years now, such actions have had to be filed electronically via the designated electronic attorney mailbox system. Provided that the action has been filed in due time and in the proper form, the statement of grounds may be submitted later. As a rule, the court will set a deadline for this purpose.

Unlike objection proceedings before the tax office, proceedings before the Fiscal Courts are subject to court fees. The fees depend on the amount in dispute and are at least EUR328. The amount in dispute is determined by the claimant’s economic interest. For example, if an action is brought against a tax assessment setting tax in the amount of EUR5,000, the court fees amount to EUR682. A person who is unable to bear the costs of the court proceedings may apply for legal aid. The Fiscal Court will grant legal aid if the action has sufficient prospects of success.

Proceedings before the Fiscal Court are not limited to seeking the annulment or amendment of an administrative act or tax assessment. An action may also be directed at obtaining the issuance of an assessment that was omitted or refused, or at compelling the authority to perform a specific act. In addition, an application may be made for suspension of enforcement of a tax assessment or for interim relief by way of an interim injunction.

The assessed tax must be paid even if an action has been brought against the tax assessment. However, it is possible to apply for suspension of enforcement. Such an application may be filed either with the tax office or with the Fiscal Court. The application has reasonable prospects of success where there are serious doubts as to the legality of the assessment or where enforcement would cause undue hardship.

The Fiscal Court first examines whether the action is admissible. If that is the case, the proceedings continue. A chamber of the Fiscal Court is usually composed of three professional judges and two lay judges. Unlike the professional judges, the lay judges generally do not have formal legal training. Instead, they contribute their practical experience to the court’s decision-making process. In straightforward cases, the matter may be referred to a single judge.

The taxpayer has the right to inspect the court files and to request that the tax office files be obtained and made available for inspection. This provides insight into the internal processes of the tax office and may, in some cases, make a decisive contribution to the success of the court proceedings.

As a rule, the court renders its decision after an oral hearing. The principle of public access applies to such hearings, meaning that third parties who are not involved in the case may also attend. However, the public may be excluded if the taxpayer so requests. Restricting public access serves to protect tax secrecy and safeguard the taxpayer’s privacy. For that reason, the exclusion of the public is sought in most cases.

The Fiscal Court establishes the facts and assesses the case from a legal perspective. The decision is rendered in the form of a judgment. It is first pronounced orally and is then set out in writing and served on the parties. In its decision, the court either upholds, amends or annuls the tax assessment, or orders the authority to issue a new decision taking into account the court’s legal view. If the Fiscal Court rules in favour of the taxpayer and amends the tax assessment, the taxpayer may receive a refund of overpaid taxes. If, by contrast, the taxpayer is ordered to pay, the tax authority may enforce the tax liability if the taxpayer has not yet paid the amount due. This may also be done by way of compulsory enforcement.

The Fiscal Court is the only judicial instance at which the case is examined both in fact and in law. It is required to establish the facts ex officio. For that purpose, the Fiscal Court has extensive powers, similar to those of the tax authorities. It may require the parties and third persons to produce documents and may examine them as witnesses.

If the tax authorities have initiated criminal tax proceedings against the taxpayer, the findings obtained in those proceedings may also be used in the Fiscal Court proceedings – eg, where data has been seized in the course of a search of the taxpayer’s premises.

If the facts can no longer be fully established – eg, because the taxpayer’s accounting records are not in proper order – the Fiscal Court has its own power to make an estimate. Where the tax bases can no longer be determined, the Fiscal Court will decide on the basis of the burden of proof (see 4.4 Burden of Proof in Judicial Tax Litigation).

Proceedings before the Fiscal Court may be brought to an end by mutual agreement between the tax authority and the taxpayer. In practice, this is usually done by entering into a factual agreement. Such an agreement relates to the facts of the case and therefore presupposes that the facts are unclear. An agreement on the legal consequences is not possible, as these follow from the facts as established.

In the case of facts giving rise to or increasing a tax liability, the burden of proof rests with the tax authorities. Facts reducing the tax burden must be proven by the taxpayer. In cross-border matters, the taxpayer is subject to enhanced duties of cooperation. If the taxpayer fails to comply with those duties, the Fiscal Court will take this into account to the taxpayer’s disadvantage.

In criminal tax proceedings, by virtue to the presumption of innocence, the burden of proof lies entirely with the authorities.

A factual agreement between the tax authority and the taxpayer is an important tool for mitigating risk.

If sufficient liquidity is available, it can be advantageous to pay the additional assessed tax in advance to prevent further interests from accruing.

In Germany, judges are not formally bound by previous case law. However, precedent decisions by German courts and the Court of Justice of the European Union (CJEU) are taken into account.

The Fiscal Court decides whether leave to appeal on points of law to the Federal Fiscal Court is granted. If leave is granted, an appeal on points of law may be lodged with the Federal Fiscal Court within one month of service of the judgment. The appeal must be substantiated within two months of service of the judgment.

If the Fiscal Court does not grant leave to appeal, which is the usual case, the party must first file a complaint against the denial of leave to appeal with the Federal Fiscal Court. If that complaint is successful, the Federal Fiscal Court grants leave, and the proceedings continue as an appeal on points of law. If the complaint is unsuccessful, no appeal may be brought and the judgment of the Fiscal Court becomes final and binding.

Leave to appeal must be granted where the case is of fundamental importance, where a decision of the Federal Fiscal Court is required for the further development of the law or to ensure the uniformity of case law, or where a procedural defect is alleged and has occurred, and the decision may have been based on it. It is not sufficient that the Fiscal Court may simply have erred in its judgment. Rather, the errors must be of a serious nature. These requirements are interpreted very restrictively by the courts. As a result, complaints against the denial of leave to appeal are only rarely successful.

In appeal proceedings, the Federal Fiscal Court rules only on questions of law. Accordingly, no further findings of fact are made at that stage – eg, through the production of documents or the examination of witnesses. Instead, the Federal Fiscal Court reviews the legal assessment of the case on the basis of the facts as established by the Fiscal Court. It is bound by those findings.

No further ordinary appeal lies against judgments of the Federal Fiscal Court. Its decision therefore generally brings the case to a final and binding conclusion.

Extraordinary remedies remain available, for example a constitutional complaint. This requires an infringement of the taxpayer’s fundamental rights. As a rule, such an infringement must first be raised before the Federal Fiscal Court by way of a complaint alleging a violation of the right to be heard. If no relief is granted in response to that complaint, a constitutional complaint may be lodged with the Federal Constitutional Court. Strict time limits and substantiation requirements apply in this regard. The prospects of success are generally limited.

Preliminary Ruling Proceedings Before the CJEU

Cases in which the interpretation of EU law is relevant may be referred by the Fiscal Courts to the Court of Justice of the European Union (CJEU) by way of a preliminary ruling procedure. The Federal Fiscal Court, as a court of last instance, is required to make such a referral where the relevant conditions are met. In deciding the case, the interpretation of EU law adopted by the CJEU is binding on both the Fiscal Court and the Federal Fiscal Court. In such cases, the already lengthy duration of proceedings before the Fiscal Courts is extended considerably.

If the Fiscal Court does not grant leave to appeal, which is the usual case, the party must first file a complaint against the denial of leave to appeal with the Federal Fiscal Court. If that complaint is successful, the Federal Fiscal Court grants leave, and the proceedings continue as an appeal on points of law (see 5.1 System for Appealing Judicial Tax Litigation).

Each chamber of the Federal Fiscal Court decides as a panel of five judges.

In principle, proceedings before the Fiscal Courts in Germany may also be resolved by way of conciliation hearing or mediation. In practice, however, these mechanisms are of almost no relevance in tax matters, as the principle of legality in taxation leaves little room for discretion.

In the case of conciliation hearings, the court designates a judge acting as conciliator who is not a member of the deciding panel. If no settlement is reached, the matter is referred back to the panel.

By contrast, mediation requires a specially trained mediator, who may be freely chosen.

In Germany, mediation or arbitration in tax cases are of almost no practical relevance, due to the principle of legality in taxation. Therefore, the tax authorities must assess tax in accordance with the law.

The tax authority is expected to inform taxpayers about their rights and obligations in the proceedings.

In addition, upon application, the tax authorities and the Federal Central Tax Office may issue a binding ruling on how a set of facts not yet realised would be assessed, provided there is a special interest in such ruling because significant tax consequences are expected.

In Germany, mediation or arbitration in tax cases are of almost no practical relevance.

In Germany, mediation or arbitration in tax cases are of almost no practical relevance (see, also, 8.4. Unilateral/Bilateral Advance Pricing Agreements, on Transfer Pricing).

In Germany, a strict distinction is drawn, when sanctioning tax violations, between criminal tax law and the law of administrative offences.

Criminal tax law applies exclusively to persons (individuals). Germany does not have a corporate criminal law. All attempts to introduce such a regime have failed. A person may incur criminal liability for tax evasion if he or she intentionally submits an incorrect tax return that understates tax, or fails to file a tax return where required to do so; conditional intent (dolus eventualis) is sufficient. Whether the tax debt is paid at a later stage is irrelevant in this respect. Tax evasion is an offence committed by way of a false or omitted declaration and penalised by a fine or imprisonment, depending on the amount evaded and the seriousness of the offence.

The law of administrative offences applies both to natural persons and to companies. If a natural person causes tax to be understated through recklessness, a particularly serious form of negligence, an administrative fine may be imposed. Unlike criminal law, the law of administrative offences also permits sanctions to be imposed on companies. In practice, fines imposed on companies often result from organisational or compliance failures at management level that enabled employees to commit criminal offences or administrative offences.

In recent years, the legislature has simplified the rules on criminal confiscation of the proceeds of crime and remuneration for the offence. In practice, confiscation often has an even harsher effect than the punishment itself.

Most criminal tax investigations arise out of routine tax audit proceedings. In addition, the tax authorities regularly define audit priorities that focus on particular sectors or types of investment. Other sources of information include, for example, European investigations conducted by the EPPO and subsequently transmitted to Germany.

As soon as a tax official suspects that a criminal offence may have been committed, they must refer the matter to the competent investigative authority for examination. This will usually be the criminal tax and administrative fines unit, a specialised division within the tax office. It handles smaller tax evasion cases itself, whereas more serious cases are referred to the public prosecutor’s office, which then directs the investigation from the outset, unlike in Anglo-American legal systems. The investigative authority initiates investigations proceedings against the persons concerned. From that point onwards, they enjoy all the rights of a suspect, including, for example, the right to remain silent.

Tax assessment proceedings and tax dispute proceedings, on the one hand, and criminal or administrative offence investigations, on the other, are separate proceedings in Germany and may lead to different outcomes. Although they run in parallel and the authorities coordinate with one another, each authority reaches its own decision independently. The court systems and appeal routes are, likewise, separate.

The legislature has acknowledged this issue and, in Section 396 of the German Fiscal Code, has provided the investigating authority and the criminal court with the option of staying the proceedings until the tax assessment has become final and binding. In practice, however, this option is not used. The main reason is that the criminal limitation periods expire before a Fiscal Court or the Federal Fiscal Court have ruled on the matter. Proceedings in the fiscal court system in Germany generally take significantly longer than proceedings before the criminal courts.

If the tax authority suspects tax evasion, it will usually initiate a criminal tax investigation. This is because, in particular, “conditional intent” (dolus eventualis) in cases of tax evasion may, under German case law, be established relatively quickly. In addition, this interrupts the limitation period for additional tax assessments, which is significantly longer for criminal offences. Only if it later emerges that no criminal offence has been committed would the matter then be pursued as an administrative offence case.

If companies are also affected, proceedings are often initiated against the natural persons concerned for intentional tax evasion, while separate proceedings are also brought against the companies as secondary parties, either with a view to the imposition of a corporate fine or a possible confiscation order.

As explained in 7.2 Relationship Between Administrative and Criminal Processes,tax assessment and tax dispute proceedings, on the one hand, and criminal tax proceedings, on the other, are separate proceedings in Germany.

Tax Assessment Proceedings

Once the extent to which tax assessments are incorrect has been established, the competent tax office issues amended tax assessments. The taxpayer may file an administrative objection against these assessments, which must then be decided by the tax office itself, acting through its internal appeals department. The objection decision may then be challenged before the Fiscal Court. In the cases specifically provided for by statute, the decision of the Fiscal Court may be appealed on points of law to the Federal Fiscal Court.

Criminal Proceedings

Investigations conducted under the direction of the public prosecutor’s office end either with the discontinuation of the proceedings, an application for a penal order (ie, a conviction by written order without an oral hearing in less serious cases), or the filing of an indictment.

The criminal court with jurisdiction depends on the likely sentence in the event of conviction. As a rule, where there is a significant allegation of tax evasion, and a custodial sentence without suspension on probation is a realistic possibility, the public prosecutor’s office will bring the indictment before the Commercial Crime Chamber of the Regional Court. A further appeal on points of law may then be brought before the Federal Court of Justice. In less serious cases, the indictment is filed with the Local Court (either before a single criminal judge or the lay assessors’ court). Depending on the circumstances, judgments of the Local Court may also be appealed to the Regional Court, which may result in an additional instance.

So-called post-offence conduct is of considerable importance for sentencing. In other words, a key point is how the person concerned responds to the offence once it has been discovered and they are aware that they have committed wrongdoing. In this context, prompt payment of the outstanding tax liability may have a significantly mitigating effect on sentencing as a form of reparation.

In Germany, it is possible to obtain immunity from prosecution by making a voluntary disclosure and paying the tax due together with interest. Where the amount of tax evaded exceeds EUR25,000, the person making the voluntary disclosure is entitled to have the proceedings discontinued upon payment of a statutory surcharge.

If, however, the offence has already been discovered or an investigation is already under way, a negotiated resolution may still be possible, but is considerably more difficult to achieve. This requires: (i) reaching an agreement with the tax office and, where appropriate, entering into a factual agreement; and (ii) negotiating with the public prosecutor’s office or the criminal court for the proceedings to be discontinued subject to the payment of a monetary condition under Section 153a of the German Code of Criminal Procedure.

The relationship between tax assessment proceedings and criminal tax proceedings, as well as the corresponding judicial routes, is set out in 7.4 Stages of Administrative Processes and Criminal Cases.

Where the Regional Court renders judgment in criminal tax proceedings, that judgment may be challenged by way of an appeal on points of law to the Federal Court of Justice. Under the Federal Court of Justice’s internal allocation of jurisdiction, the First Criminal Senate is always responsible for tax evasion cases.

In substantive terms, such an appeal may be based only on errors of law or specific procedural violations, such as the failure properly to consider or deal with applications for the taking of evidence, or an incorrect composition of the court. Statistically, an appeal on points of law in criminal proceedings has a success rate of only around 3–4%. It therefore always makes sense to mount a proper defence at the trial stage rather than relying on the appeal.

In the past, transfer pricing disputes were only very rarely the subject of criminal or administrative offence proceedings. The reason was that intent or negligence was difficult to prove. This is now beginning to change as the methods for determining transfer prices become increasingly specific and, in particular, as documentation requirements become more stringent. Where transfer pricing violations occur and the documentation required under national procedural rules is missing or incomplete, this is regarded as an indication that, at the very least, the necessary standard of care in dealing with the issue was not observed.

The position is different in the case of breaches of rules aimed at combating tax avoidance. In that context, specific domestic administrative offence provisions apply – eg, where a required disclosure is not made on time or is incomplete. Whether the same conduct may also amount to tax evasion in Germany is examined separately. As explained in 7.1 Interaction of Tax Assessments With Tax Infringements, the decisive question is whether the relevant facts were disclosed to the German tax authorities fully and in a manner that allowed them to be properly reviewed. If that is the case, there is no tax evasion, even if the tax authorities ultimately arrive at a different tax treatment.

In Germany, double taxation is primarily avoided through double tax treaties (DTTs), which allocate taxing rights between the state of residence and the source state and provide for corresponding relief mechanisms.

In essence, two methods are used to prevent double taxation: (i) the exemption method, under which foreign-source income is excluded from German taxation; and (ii) the credit method, under which taxes paid abroad are credited against the German tax liability.

Where no double tax treaty applies, relief is granted on the basis of domestic law, in particular through the crediting of foreign taxes under Section 34c of the German Income Tax Act.

If double taxation nevertheless arises – eg, as a result of differing interpretations of a double tax treaty by the states concerned – a mutual agreement procedure is regularly initiated. In parallel, domestic appeal proceedings are often continued or suspended pending the outcome of this procedure.

The rules introduced by the Multilateral Instrument (MLI) and the EU Dispute Resolution Directive supplement this system, but have so far had only limited practical significance.

The anti-abuse provision set out in Section 42 of the German Fiscal Code also applies in cross-border situations, but it continues to be interpreted restrictively. As a rule, more specific provisions of international tax law take precedence.

At the same time, there is a discernible trend towards the tax authorities placing increasing emphasis on economic substance, decision-making processes and the actual allocation of functions. The Principal Purpose Test is likely to reinforce this development further in the future.

International transfer pricing adjustments are challenged both through domestic appeal proceedings and by way of mutual agreement procedures.

While mutual agreement procedures play a central role, particularly in classic double taxation conflicts, proceedings before the Fiscal Courts are becoming increasingly important in complex cases.

Advance Pricing Agreements (APAs) are an established instrument in Germany for the prevention of cross-border transfer pricing disputes and are regularly used, particularly in the form of bilateral or multilateral procedures, by large multinational enterprise groups. The competent authority is the Federal Central Tax Office.

By contrast, unilateral APAs play only a minor role in practice and are generally handled restrictively by the tax authorities since they have no binding effect vis-à-vis other states. They therefore provide only limited legal certainty.

Bilateral and multilateral APAs are concluded on the basis of double tax treaties or the EU Arbitration Convention within the framework of a mutual agreement procedure and offer enhanced legal certainty, as the participating states agree uniformly on the relevant transfer pricing methods.

The procedure typically follows a structured sequence:

• a preliminary meeting with the tax authorities;
• the submission of a comprehensive application;
• review and exchange of information;
• negotiations between the tax administrations involved; and
• the conclusion of a binding agreement for a specified period.

The procedure involves considerable effort and fees and is therefore used primarily in complex cross-border cases.

A key current focus of cross-border tax disputes in Germany concerns the taxation of internationally structured private equity investments, particularly those connected with Munich as a business location.

For several years, the tax authorities have been systematically scrutinising structures in which foreign fund entities make use of German management or service companies, or in which domestic fund entities are combined with foreign blocker and feeder structures. The central issue is whether a permanent establishment is created in Germany, in particular a place of effective management.

The assumption of such a place of effective management may result in the fund entity becoming subject to unlimited tax liability in Germany and may further mean that its investors – typically foreign institutional investors – are deemed to derive income attributable to a German permanent establishment. This gives rise to tax-filing obligations and significant administrative burdens.

At the same time, the distinction between asset management activity and commercial activity is increasingly coming under review. Within this context, the tax authorities argue that an intensive level of influence over portfolio companies may result in the activity being classified as commercial. In combination with an assumed place of management in Germany, this creates a substantial risk of retroactive trade tax assessments at municipal level, particularly in the Munich area, often covering several years.

It is striking that these cases frequently do not remain confined to the tax sphere. In a large number of instances, parallel criminal tax investigations are initiated, with classic tax issues being pursued by means of criminal investigative measures. This significantly aggravates the procedural situation.

Such investigations are directed not only at the fund entities concerned, but often also at foreign fund managers. In individual cases, tax advisers are also drawn into the proceedings, even though the underlying structures are generally market-standard and were developed with the involvement of established advisers.

In addition, it is sometimes argued that foreign fund managers are in fact exercising management functions in relation to German entities. This may give rise to personal liability risks.

Another major area of cross-border disputes concerns VAT carousel fraud. These cases are increasingly being pursued by the European Public Prosecutor’s Office and regularly give rise to parallel tax and criminal risks in several jurisdictions.

Tax-related State aid issues remain relevant in Germany, particularly in connection with government support measures and sector-specific rules.

The focus continues to be on measures adopted in the context of COVID-19 business support programmes, as well as on more recent developments concerning special tax regimes – eg, in the area of casino taxation.

In addition, the Federal Fiscal Court has referred questions concerning the tax treatment of charitable service entities to the Court of Justice of the European Union, which underlines the continuing relevance of State aid issues in tax law.

If a tax measure is classified as unlawful State aid, Germany is required to recover the tax advantage granted in full and to amend or repeal the underlying rule.

Recovery is effected at the national level by amending or revoking the relevant tax assessments vis-à-vis the beneficiary undertakings. In this way, the tax advantage previously granted is eliminated retroactively and the tax is assessed at a correspondingly higher amount. As a rule, the amount to be recovered bears interest in order to neutralise in full the advantage obtained through the aid.

Such proceedings are often triggered by complaints from competitors, but they may also be initiated on the basis of notifications by public authorities.

Affected undertakings may challenge both the State aid law basis of the measure and the domestic tax-law implementation of the recovery before the courts.

In practice, such challenges are generally directed against the amended tax assessments by which the previously granted advantage is reversed. These proceedings lie at the interface between State aid law and domestic tax procedural law.

The main issues in dispute concern, in particular, the classification of the measure as unlawful State aid and the specific manner in which the recovery is implemented at the level of the tax assessment.

Claims for State liability in connection with the recovery of unlawful tax-related State aid play only a marginal role in practice.

This is due in particular to the fact that the national authorities have no discretion when implementing the relevant decisions of the European Commission.

Germany has opted to apply Part VI of the MLI, with the result that mandatory arbitration procedures apply where the respective treaty partner has likewise adopted the corresponding provisions.

Arbitration proceedings generally come into play where a mutual agreement procedure between the states concerned does not result in an agreement.

There are no substantive limitations in this regard; both questions of fact and questions of law may be the subject of arbitration proceedings.

In practice, both “baseball arbitration” and “independent opinion” procedures are used, with the former predominating.

In this respect, Germany follows a flexible approach in order to ensure that arbitration proceedings do not fail because of the choice of procedural model.

Germany implemented the EU Arbitration Directive through the Act on the Resolution of Double Taxation Agreement Disputes within the European Union, which entered into force on 13 December 2019.

Germany has already participated in international arbitration proceedings, some of which have also been concluded.

Nevertheless, the practical significance of such proceedings remains limited to date when compared with mutual agreement procedures.

Germany supports the implementation of the OECD’s Two-Pillar Solution.

While the detailed design of Pillar One is still being negotiated at the international level, Pillar Two has already been introduced through Germany’s national implementation of the relevant EU Directive.

The practical implications for tax disputes remain to be seen.

Arbitration proceedings are largely subject to confidentiality.

This is consistent with the domestic rules on tax secrecy, under which tax-related information may, as a rule, not be disclosed.

The mutual agreement procedure remains the principal instrument for resolving international tax disputes.

It is used both on the basis of double tax treaties and within the framework of the EU Arbitration Convention and regularly constitutes a prerequisite for subsequent arbitration proceedings.

Mutual agreement procedures are conducted between the competent authorities of the states concerned, without the taxpayer being directly involved.

In practice, however, the involvement of external advisers is common, particularly for the preparation of the procedure and coordination with the authorities.

As a general rule, no procedural fees are incurred in administrative appeal proceedings against tax assessments. The position may, however, be different in the case of an objection against assessments relating to municipal taxes such as trade tax or property tax: if the objection is unsuccessful, fees are payable. Those fees are governed by the cost statutes of the respective German federal states.

The costs of proceedings before the Fiscal Court system are governed by the Fiscal Court Code and the Court Costs Act. The amount of court costs depends on the amount in dispute – ie, the contested tax claim – as well as on the manner in which the proceedings are concluded.

In interim relief proceedings, case law applies a percentage reduction to the amount in dispute. Costs are incurred separately at each instance.

In court proceedings, the procedural fee becomes due upon the filing of the statement of claim, and the claimant must pay a corresponding advance on costs. In certain cases, legal aid may be applied for.

The final allocation of costs depends on the outcome of the proceedings. If the claim is successful, the claimant is entitled to reimbursement of the procedural costs – ie, the court costs and the claimant’s necessary expenses. This includes the statutory fees of legal counsel, for example. It also includes interest on the court costs paid in advance. If the claimant is unsuccessful, the claimant must bear the procedural costs. The claimant is not required to reimburse the expenses of the tax authorities.

Administrative measures must comply with the law. If the tax authority culpably makes errors in the course of a tax assessment, the taxpayer may have a claim in official liability where recoverable damage has been caused by the conduct giving rise to liability. This applies, in particular, to the costs of legal proceedings. Official liability claims must not be brought before the Fiscal Courts, but must be pursued separately before the civil courts.

If the claimant and the tax authority reach an agreement in the course of the court proceedings and declare the matter settled, the court decides on the allocation of costs in its equitable discretion, taking into account the case as previously argued and the state of the dispute. In appropriate cases, this may result in the claimant being relieved of the obligation to bear the court costs.

In addition, the individual German federal states may, by statutory instrument, provide for court fees to be reduced or waived in certain cases involving alternative dispute resolution. However, only the federal state of Lower Saxony has made use of this regulatory power.

The most recent data currently available on proceedings before the Fiscal Courts relate to 2024. According to the Federal Statistical Office, 25,043 proceedings were pending before the Fiscal Courts at the end of 2024. For proceedings before the Federal Fiscal Court, data are already available for 2025. According to the Federal Fiscal Court’s annual report, 1,318 proceedings were pending at the end of 2025.

No statistics are maintained on the average number of cases allocated to an individual judge or to a judicial panel at first instance.

No statistics are maintained on the amounts in dispute in proceedings before the Fiscal Courts. It should be noted, however, that the amount in dispute in Fiscal Court proceedings is at least EUR1,500. In addition, an amount in dispute of EUR5,000 is to be assumed where the facts and circumstances of the case do not provide sufficient indication for determining the amount in dispute.

According to the Federal Statistical Office, a total of 28,375 proceedings were commenced before the German Fiscal Courts in 2024. Of these, 23,321 were substantive actions, 4,001 concerned the granting of interim relief, and 1,053 related to other matters, such as cost issues. No statistics are maintained on the specific subject matter of the proceedings commenced.

In 2024, a total of 28,452 proceedings were disposed of by the German Fiscal Courts. Of these, 24,546 were substantive actions and 3,906 concerned the granting of interim relief. By way of example, these proceedings were distributed across the various types of tax as follows, it being possible for a single proceeding to concern more than one type of tax:

• income tax: 12,733;
• corporate income tax: 2,611;
• transaction taxes: 6,102;
• customs duties: 173; and
• inheritance and gift tax: 454.

In 2025, the Federal Fiscal Court disposed of a total of 1,847 proceedings. During the same year, 1,652 new proceedings were filed.

No statistical data are collected on the amounts in dispute in the respective proceedings.

Of the 24,546 actions before the Fiscal Courts that were disposed of in 2024, 7,132 were terminated by withdrawal of the claim. A further 8,820 proceedings were declared settled by mutual agreement between the claimant and the defendant, meaning that no decision on the merits was rendered by the court.

A further 2,397 proceedings were disposed of in other ways – eg, by a stay of proceedings or a referral to another court.

Where the Fiscal Courts decided by judgment (4,356 proceedings) or by court order without an oral hearing (1,841 proceedings), the claim was upheld in full in 530 cases and in part in 557 cases.

In 3,162 cases, the claim was dismissed as unfounded, and in 1,948 cases as inadmissible. On that basis, where a judicial decision on the merits was rendered, the overall success rate, whether in whole or in part, was approximately 17.54%. It should be added, however, that proceedings declared settled by mutual agreement may also reflect a full or partial success for the claimant.

Before the Federal Fiscal Court, 40% of all appeals on points of law and 15% of all complaints against the denial of leave to appeal were successful, whether in whole or in part, in 2025.

German tax dispute proceedings are shaped by a highly complex body of tax law, a distinct procedural framework, administrative guidance elaborating on the statutory provisions, and domestic (Federal Fiscal Court) as well as supranational (Court of Justice of the European Union (CJEU)) case law, all of which must be taken into account in applying the law.

Against this backdrop, differing views regularly arise between the tax authorities and taxpayers. The issues in dispute concern not only substantive tax law and tax procedural law, but also the underlying facts relevant for tax purposes – eg, where the tax bases are estimated.

Tax disputes are also frequently accompanied by parallel criminal tax proceedings. It is thus essential for taxpayers to engage advisers experienced in tax and criminal tax law in order to assess the prospects of success in a tax dispute, conduct it properly and take into account its interaction with criminal tax law.

The specific strategy in a tax dispute depends in particular on the prospects of success, the time horizon, the client’s economic situation and objectives, and the applicable procedural framework. Each case develops differently. Where a client is the subject of a criminal tax investigation and the tax authorities’ legal position is open to challenge, it is particularly important to address the matter already at the tax assessment stage in order to deprive any allegation of tax evasion of its tax basis.

In addition, in tax dispute proceedings it is regularly necessary to weigh the likely duration and cost of the proceedings against the potential benefit in terms of the tax assessment. Given the typically lengthy duration of administrative appeal and court proceedings, it may, in appropriate cases, be advisable to explore settlement options with the tax authorities in order to bring the matter to an efficient and commercially sensible resolution. Where a disagreement becomes apparent at an early stage – eg, in the course of a tax audit – it may already be possible at that stage to work towards an agreed resolution. On the other hand, there may be compelling reasons to seek judicial clarification of the disputed legal issues, particularly in cases involving substantial tax claims or parallel criminal investigations.