Undeclared gift: when does limitation set in – and what should you do now?

Key takeaways

• For gift tax (Schenkungsteuer) a distinction has to be drawn between the limitation period for prosecution and the limitation period for assessment.
• The limitation period for prosecution governs whether a person can be prosecuted for evaded gift tax; the limitation period for assessment governs whether the evaded tax still has to be paid.
• Where tax has been evaded, the limitation period for prosecution is up to 15 years and the limitation period for assessment up to 10 years. The latter does not, however, expire as long as the limitation period for prosecution has not yet run out – the legislature's intention being that, on a conviction, the evaded tax should still be payable.

When does an undeclared gift become time-barred?

An undeclared gift becomes time-barred after 15 years at the latest. As regards limitation, a distinction has to be drawn between criminal limitation and limitation under tax law.

• Criminal law: Criminal limitation means that a possible tax evasion can no longer be prosecuted because of the passage of time. The precise length of the criminal limitation period depends on the nature of the tax evasion. In principle the limitation period for tax evasion is 5 years. Where there is a particularly serious case of tax evasion, the limitation period is 15 years.
• Tax law: The limitation period for assessment means that the tax authorities may no longer levy the tax because of the passage of time. The limitation period for assessment is up to 10 years. However, it does not in principle expire before the criminal limitation period. Where, for example, there is a serious case of tax evasion, the limitation period for assessment can therefore likewise be 15 years.

In addition, suspensions of the running of the period apply, for instance where investigative measures are initiated; these temporarily stop the limitation period from running. Anyone who simply "sits it out" therefore risks a claim for the tax plus interest of 6 % per year and, where applicable, criminal tax proceedings.

What is the difference between the limitation period for assessment and criminal limitation?

The limitation period for assessment determines how long the tax office may still assess gift tax, while criminal limitation determines how long a person can be prosecuted and punished for tax evasion.  

The most important points about the assessment period:

• Four years in principle: The assessment period for taxes is in principle four years (section 169(2) sentence 1 no. 2 of the Fiscal Code). Where gift tax is evaded, however, the assessment period is ten years under section 169(2) sentence 2 of the Fiscal Code, and five years in the case of a reckless understatement.  An assessment is no longer permissible once that period has expired.
• It begins at the end of the calendar year: The start of the assessment period for gift tax is governed by section 170 of the Fiscal Code: in principle it begins at the end of the calendar year in which the tax arose. A special rule applies to gifts, however: the assessment period does not begin before the end of the calendar year in which the donor died or the tax authority obtained knowledge of the completed gift. As a result, the start of the period can be pushed far into the future where gifts have not been declared.

The most important points about criminal limitation:

• Five years in principle: Tax evasion is subject to criminal limitation under sections 78 et seq. of the Criminal Code (section 369(2) of the Fiscal Code). The limitation period regularly applicable is five years (section 78(3) no. 4 of the Criminal Code). In cases of particularly serious tax evasion, section 376(1) of the Fiscal Code extends the limitation period to 15 years.
• It begins when the tax evasion is completed: The limitation period begins when the tax evasion is completed. In the case of tax evasion the offence is regularly completed once the result of the evasion (the tax understated or the tax advantage obtained) is "established" in the tax assessment, that is, once the assessment process has been concluded.  From that point the five- or fifteen-year period runs.
• The period can be interrupted: Limitation can be interrupted by certain acts of prosecution; for tax offences in particular by the notification to the accused that administrative fine proceedings have been initiated, or by the order of such notification. Even in particularly serious cases, prosecution becomes time-barred at the latest once two and a half times the statutory limitation period has elapsed since completion (that is, up to 37.5 years where the period is 15 years).

When does gift tax have to be paid on a gift?

Gift tax arises only where the gift exceeds the applicable allowances and is not covered by a specific exemption. What is decisive is the relationship between the donor and the recipient, because the level of the allowance follows from it.

Where more than the applicable allowance is transferred within 10 years, the excess is subject to gift tax. In many cases real estate, company shares or larger sums of money are transferred as well; careful tax planning is worthwhile there, because specific reliefs may apply or fall away depending on the structure.

The duty to notify also matters: gifts have to be reported to the tax office; this applies in particular where allowances might be exceeded or where the assets are difficult to value. Only in the case of clearly tax-free small everyday gifts, or gifts clearly below all the allowances, is there exceptionally no relevant duty to notify.

When does an undeclared gift amount to tax evasion?

An undeclared, taxable gift becomes tax evasion where the notification was deliberately omitted and gift tax was thereby understated. Tax evasion exists where incorrect or incomplete statements are made to the tax office, or necessary declarations are deliberately omitted, so that tax is not assessed, or is assessed too low or too late.

Intent is decisive: it is enough that the person concerned reckons that tax will arise or that a notification is required but knowingly "accepts" the risk. The mere assertion of not having known about a tax liability is not sufficient as a defence.

Set against this is the reckless understatement of tax, where tax is indeed understated but only through gross carelessness and without any deliberate intention to deceive; it is sanctioned as an administrative offence with a fine and without any custodial sentence. In practice the tax authorities concentrate on cases involving noticeable amounts, repeated transactions or recognisable concealment, for instance through concealing accounts, deliberate arrangements or internal agreements.

Whether there is tax evasion or "merely" a reckless understatement in an individual case determines the limitation periods, the sentencing range and the risk of a custodial sentence. Particularly with larger gifts that have a longer history, this classification is the central lever of the defence.

How should you act if a gift has not been declared?

Anyone who identifies an undeclared gift should proceed in a structured way and should on no account simply wait or telephone the tax office unprepared.

• Taking stock: The first step is to take stock: which assets were transferred, when and by whom to whom, which amounts are affected, which allowances have already been used in the last 10 years and which documents exist (account records, contracts, gift agreements)?
• Analysis: On this basis it can be examined whether gift tax arises at all, whether an understatement of tax has already occurred and whether intentional conduct is in question. Where intentional tax evasion is likely, a voluntary disclosure with exemption from penalty can be the decisive route to avoiding a fine or custodial sentence; it does, however, presuppose full disclosure of all the relevant matters and years as well as payment in full of the tax plus 6 % interest per year and, where applicable, surcharges.

Where a voluntary disclosure with exemption from penalty is no longer possible because investigations are already under way or an audit order has been issued, the task is damage limitation: payment in full, cooperative conduct and a coordinated defence strategy in order to limit the sentence to a fine. Only in exceptional cases, for instance where the amounts are very small and intent is clearly absent, can a simple correction suffice; whether that is sustainable should always be examined by a specialist.