Suing the tax office: how to enforce your rights before the tax court

Key takeaways:

• Proceedings against the tax office are brought before the competent tax court (Finanzgericht), as a rule within one month of receipt of the decision on the appeal.
• The prospects of success depend substantially on well-documented reasoning.
• The alternatives to a judgment are in particular settlements and consensual disposals; court proceedings incur costs, and the losing party regularly bears them.

How must proceedings against the tax office be filed?

Proceedings against the tax office are brought before the tax court (Finanzgericht). The claim must be filed in writing or electronically and contain all the minimum particulars so that the court can identify the case unambiguously.

• Competent court: As a rule, the tax court in whose district the tax authority whose decision is being challenged has its seat has local jurisdiction; in the case of certain supreme tax authorities, the claimant's residence, place of management or habitual abode may be decisive instead. In practice this means: private individuals turn to the tax court for the district in which they live, where their competent tax office is located there; companies are guided by the allocation of their place of management or seat.
• Form: The claim is brought in writing or recorded by the court registry; in addition, electronic filing via approved secure transmission channels is possible. "In writing" here means a signed pleading that reaches the court by post, fax or in a permissible electronic form.
• Time limit: For actions for annulment and for actions to compel administrative action, a one-month period from notification of the decision on the appeal applies in principle; where information on the available legal remedies is missing or incorrect, this period is extended to one year. The time limit is also observed where the claim reaches, within that period, the tax office that issued the decision on the appeal; that office must forward the claim to the tax court without delay.
• Minimum content: The statement of claim must identify the claimant, the defendant authority and the subject matter of the relief sought and, in actions for annulment, additionally the contested assessment and the decision on the appeal. The court must be able to see which type of tax, which period and which specific decision you are challenging, and what you are asking the court to do (for example annulment or amendment of an assessment, or the issue of one).
• Reasons: The Tax Court Rules (FGO) do not provide for an express obligation to give reasons in every case, but in practice reasons are indispensable. Without setting out the infringement of your rights and the underlying facts, the court will scarcely be able to decide in your favour. In practice the reasons are either submitted with the statement of claim or filed shortly afterwards. For companies, structured reasons are advisable, with a statement of facts, a legal assessment and annexes (for example management accounts, contracts, expert opinions).
• No obligation to instruct a lawyer: You are not required to be represented by a lawyer in proceedings before the tax court, but this is strongly recommended. After all, you will be facing an experienced tax official in the proceedings.

How do proceedings before the tax court run?

Proceedings against the tax office lead into an orderly court process. Private individuals and companies should know the essential steps in order to observe time limits and make use of the opportunities available. The court proceedings run as follows:

• Filing the claim: The proceedings begin with the filing of the claim at the tax court. On receipt of the claim the matter becomes pending and the court fee falls due. The court first examines whether the formal requirements – in particular jurisdiction, type of action, time limit and preliminary proceedings – are met.
• Requesting the files: The court then serves the claim on the tax authority and requests the administrative files. The authority is given a deadline for written submissions. In this phase the tax office sets out its view of the case and submits the relevant documents to the court.
• Response: The claimant has the opportunity to respond to those submissions, to supplement their reasoning and to name further evidence. The proceedings are governed in principle by the inquisitorial principle: the court investigates the facts of its own motion, but may expect the parties to cooperate by providing documents and explanations.
• Taking of evidence: The court can order evidence to be taken, for example the examination of witnesses, expert opinions or the submission of additional documents. This is relevant above all in complex cases involving estimates, transfer prices or extensive tax audit findings.
• Court hearing: In most cases an oral hearing takes place. The court discusses the legal and factual questions with both sides and frequently gives a provisional assessment. The oral hearing is the right moment to discuss settlement solutions.

The proceedings generally end with a judgment or – in straightforward cases without particular factual or legal difficulty – with a court order (Gerichtsbescheid). A court order is issued without an oral hearing; the claimant may, however, apply for an oral hearing, whereupon the court order is deemed not to have been issued and the matter is heard in the ordinary way.

How good are the prospects of success in proceedings against the tax office?

The prospects of success depend on several factors. The most relevant is whether the contested assessment is in fact unlawful and whether this can be set out and substantiated convincingly in the proceedings.

A claim has good prospects of success where there are clear errors of law, such as an incorrect interpretation of tax legislation, a failure to observe the case law of the Federal Fiscal Court (Bundesfinanzhof) or breaches of procedural rules (for example limitation, notification, the right to be heard). In such cases the unlawfulness of the assessment can be substantiated specifically by reference to provisions and decisions. In addition, the following factors also influence the prospects of success:

• Determination of the facts: A second point of attack is errors in the determination of the facts. Where it becomes apparent that the tax office has assessed the facts incompletely, incorrectly or one-sidedly – for example through one-sided additional estimates, ignored costs typical of the sector or a failure to take account of important receipts – the chances of success rise considerably. Particularly after tax audits, excessive estimates and one-sided valuations by the auditors can be corrected in proceedings before the tax court.
• Reasoning: The quality of the reasoning and of the evidence is decisive. The prospects of success rise where the claimant provides a clear, structured account: which items are in dispute, which provisions are affected, what the correct figures are, and which documents substantiate this.
• Appeal proceedings: Finally, conduct in the appeal proceedings has an effect. Where the points in dispute have already been carefully prepared, the files are complete and the facts are clearly documented, the court can decide more quickly and on a sounder basis. Where, by contrast, central information was put forward only late or inconsistently, this can reduce its persuasive force.

What alternatives are there to a judgment being handed down?

Proceedings before the tax court do not necessarily have to end with a contested judgment. There are several alternatives that can offer attractive routes to a solution for companies and private individuals.

• Settlement: The FGO does not provide for an expressly regulated court settlement, but practice works with factual agreements (tatsächliche Verständigungen) and mutual declarations that the matter has been disposed of. The typical pattern is: on the basis of a factual agreement, the tax office amends the assessment within the legally permissible margin (for example adjusting estimates or recognising certain expenses), the claimant declares the matter disposed of, and the court decides only on the costs under sections 135 et seq. and 138 FGO. The tax office is in a particular position here: it is strictly bound by the legality and uniformity of taxation (section 85 AO) and may not conclude "deals" outside the law, but at the same time it has considerable power to shape matters, because it can directly change the basis of the dispute by amending assessments.
• Conciliation judges and mediation: Through section 155 FGO, section 278(5) of the Code of Civil Procedure (ZPO) (conciliation judge) and section 278a ZPO (mediation) apply mutatis mutandis in tax proceedings as well. A conciliation judge is a judge who does not decide the case but conducts a conciliation hearing and can use all methods of conflict resolution – including mediation – to reach a consensual solution. Mediation under section 278a ZPO makes it possible to stay the tax court proceedings and seek an agreement outside the contentious process. Because the tax office is bound by the law, such procedures come into consideration above all for questions of fact, estimates, valuation  and discretion; tax assessments that deliberately depart from the law are excluded.
• In certain cross-border situations, mutual agreement or arbitration procedures under double taxation treaties come into consideration. Here the states involved clarify how the tax bases are to be allocated. In such constellations the claim can be withdrawn in part or concentrated on particular points, while other questions are resolved in the mutual agreement procedure.

How high are the costs of proceedings before the tax court?

Proceedings before the tax court involve costs that depend on the amount in dispute and on the course of the proceedings. For companies and private individuals it is important to assess this cost risk realistically before filing a claim.

• Court costs: Proceedings before the tax court are in principle subject to fees; the procedural fee arises as soon as the claim is filed. The amount depends on the value in dispute, that is, regularly on the difference between the tax assessed and the tax sought. Where the amounts in dispute are in the five-figure range, the court costs are typically in the upper three- to middle four-figure range.
• Your own legal fees: The remuneration of your own lawyer is determined either by the Lawyers' Remuneration Act (RVG), and thus likewise by the value in dispute, or by an individual agreement on an hourly basis. Extensive proceedings with several hearings, complex taking of evidence and high tax significance lead in any event to higher legal fees.
• Allocation of costs: In principle the unsuccessful party bears the costs of the proceedings – court fees and the necessary legal costs of the other side. Where a party is partially successful, the costs are apportioned. If the claim is withdrawn, the claimant bears the costs of the proceedings.
• Legal aid: Legal aid can be granted to claimants in weak economic circumstances where the proceedings offer sufficient prospects of success and financing from their own resources is not possible. This is an important instrument for private individuals with limited income; for companies, legal aid comes into consideration less often, since they have to set out their economic capacity in detail.

Before filing a claim it is advisable to weigh the value in dispute, the likely cost framework and the potential for success against one another. Anyone who clarifies these points early on can decide deliberately whether tax court proceedings, a settlement or another solution is the most sensible option in economic and legal terms.