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Threat of penalty payments – Even ‘dormant’ corporations have to file tax returns

The Federal Fiscal Court (Bundesfinanzhof, BFH) recently confirmed that local tax offices can threaten to impose penalties in order to ensure that ‘dormant’ corporations file their tax returns.

If a local tax office wants to ensure that a taxpayer takes specific actions (e.g. files their tax return) then it may resort to penalty payments. As a first step, the tax office has to threaten penalty payments and, in this connection, set an appropriate deadline for the taxpayer so that the required action can subsequently be taken. If this deadline passes without any result then the tax offices are supposed to set the amount of the penalty payment within two weeks.

In the case in question, (BFH ruling of 19.8.2021, case reference: VII R 34/20), the last time a single-member GmbH [German private limited company] had filed its tax returns was for 2011. Subsequently, the GmbH had notified the local tax office that its business operations had been discontinued and that only a ‘shell GmbH with no commercial activity’ would be maintained. A ‘zero report’ was filed together with the notification. At first, the tax office was satisfied with this statement, some years later however, it asked the GmbH to file tax returns for 2017 and underscored its request with the threat of a penalty payment.

The BFH endorsed the approach of the local tax office and decided that the threat of a penalty payment had been rightful and proper. The company had rightly been requested to file tax returns. According to the established case law, abuse of discretion may only be deemed to exist if the local tax office demands that a tax return be filed even though it has been clearly and properly established that there is no tax liability. 

That was however precisely not the situation in the present case because it was a matter of dispute between the tax office and the GmbH whether or not there was a tax liability. Moreover, it had not been unequivocally demonstrated that the business operations had been discontinued. 

Please note: An explicit declaration of termination of business operations had not been provided. The local tax office had to perform this check as part of its tax assessment procedure and, to this end, it was necessary for a tax return to be filed.

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