Joint Audits – Any agreement reached between the tax administrations is not how taxpayers are eventually being taxed

Driven by the OECD’s Base Erosion and Profit Shifting (“BEPS”) initiative, there is a trend towards cross-border administrative cooperation in the context of international tax law. This trend manifests itself in concrete measures such as the International Compliance Assurance Programme (“ICAP”) and joint tax audits (“Joint Audits”). The latter express the desire to achieve legal certainty and tax justice through an efficient procedure to avoid double taxation. Nevertheless, in some places a joint audit turns out to be a Trojan horse if collusive behaviour by the tax authorities involved leads to wrongful tax assessments. In this context, the question arises whether the joint audit findings are becoming a reality for the taxpayers involved, with the potential effect that they are denied access to legal remedies? The following blog entry examines this in the light of the recent judgement handed down by the Lower Tax Court of Duesseldorf dated 28 May 2020 (9 K 1904/18 G). The judgement is very instructive despite the fact that it was the taxpayer who in vain pointed towards an agreement reached by the two tax administrations involved in the joint audit, as it was denied by the court.

Joint audits are a form of coordinated tax audits which aim to achieve a consensus on the facts relevant to the decision by means of coordinated audit procedures. So-called simultaneous audits also belong to the coordinated tax audits. Whereas simultaneous audits are characterized by a timely exchange of information between the tax authorities involved within the scope of independent external audits, joint audits provide the right of presence and a limited active right of inspection for foreign tax auditors in Germany and vice versa. Although coordinated tax audits must be distinguished from mutual agreement procedures, in practice, double taxation is often avoided by means of a harmonious assessment of the mutually agreed facts. There is nothing fundamentally wrong with this. However, an unevenly distributed negotiating power in favour of the German tax authorities in combination with the apparently less stringent objectives of foreign tax authorities and a focus to close audits quicker than in Germany, can lead to concerted audit findings which result in an wrongful tax assessments and thus contradict the idea of tax justice.

In this context, the recent judgement of the Lower Tax Court of Duesseldorf is to be welcomed, because it clarifies that the agreements reached between the tax administrations in such a coordinated tax audit do not cloud the prospects of success in any kind of appeals procedure, be it at the administrative appeals tribunal or the German tax courts.

The determination of profits of a building site or construction permanent establishment was at the heart of the decision. The particular question was to what extent the profit generated from developing and selling real estate on the own land of a German partnership, a GmbH & Co. KG (“KG”), would have to be allocated to its Dutch management permanent establishment because that portion of profit would have to be deducted in determining the trade tax profit taxable in Germany under sections 7 and 9 No. 3 Municipal Trade Tax Act (“Gewerbesteuergesetz”). According to the findings of the German and Dutch tax authorities in the Joint Audit, the capital gains from these construction projects on the land owned by KG were allocated in full to the German permanent establishment (“PE”), i.e. the building or construction site. However, the capital gain was not allocated pro rata to the Dutch management PE.

The plaintiff, i.e. the taxpayer, contested the trade tax assessment notices in this respect and requested that the apportionment (20 % DE; 80 % NL) determined by mutual agreement in the course of the joint audit of building and construction sites on third-party land be applied to the disputed facts. This would have turned the decision reached with respect to the projects on own land almost upside down and would have avoided the payment of large parts of municipal trade tax.

Quite remarkably, the observer witnesses that both tax administrations, in performing the joint tax audit did not give an thought to the management PE and what profit should be allocated to it from building and construction sites on the KG’s own land in Germany. In other words, the two tax administrations involved applied local and international tax law inappropriately to the detriment of the taxpayer. Unfortunately, this seems to be happening more and more, in particular in such joint audits where the legislative control through the taxpayer is limited. Such outcome may be one of the reasons why the German tax administration likes the joint audits so much and promotes them so heavily. Taxpayer should be aware of that and hedge their position be evaluating all options available, foremost the appeal to the Lower Tax Court.

This holds despite the fact that the Lower Tax Court of Duesseldorf, however, (not so surprisingly) partially ruled to the plaintiff’s disadvantage in that the alleged transfer of the allocation of the capital gains from construction sites on third-party land to situations where construction work is carried out on the plaintiff’s own land does not lead to a proper result. Still, depending on the further outcome of the appeal, the taxpayer managed to have at least a reduction of municipal trade tax as there would be some allocation of profit to the Dutch management PE in the area of approximately 30%. Furthermore, the court held that a binding commitment to the negotiation result could not be concluded from a joint audit, since agreements between the tax administrations involved are not binding on the taxpayer(s) or any tax court in the two countries.

This statement is the main message from the judgement which shows that the procedures of a joint tax audit to which the taxpayer may not be an active party or no party at all, do not deny taxpayers access to other instances in the German tax system.

Hence, should a joint audit (un-)expectedly turn out to be a Trojan horse in practice, it is important to keep calm for the time being. Because even after the conclusion of a joint audit and the avoidance of double taxation, the taxpayer has all legal remedies open to him. If the collusive behaviour of the tax authorities involved in a joint audit threatens to lead to wrongful and unfavourable tax assessments for the taxpayer as in the case at hand with no profit being allocated to the Dutch management PE, the taxpayer should appeal the matter to the administrative appeals tribunal or, if possible, directly to the responsible Lower Tax Court.

The DLA Piper Transfer Pricing Team in Frankfurt will be happy to answer any further questions in this context. Please feel free to send us an e-mail to or