Tax penalties

Tax penalties

In addition to the right to levy a tax assessment, the Tax and Customs Administration also has the right to impose a tax penalty. If the Tax and Customs Administration proceeds to impose a penalty, this will often be announced in advance. There is an opportunity to respond to this announcement in order to avoid a penalty. Upon receiving such an announcement, it is advisable to immediately engage legal assistance. Our team of legal experts, lawyers, and tax specialists will then determine the best legal response to the announcement. For example, there is no obligation to answer questions from the Tax and Customs Administration.

The Tax and Customs Administration has the authority to impose various types of fines. For instance, the Tax and Customs Administration can impose a default fine if the tax return is not completed and submitted (on time). Additionally, the Tax and Customs Administration can impose an offense fine if an organization fails to comply with the obligations arising from tax law. Furthermore, an accomplice fine may be imposed. An accomplice fine may be imposed on legal, tax, or financial advisors of an organization to which an offense fine is imposed. When imposing an offense fine, the Tax and Customs Administration must demonstrate that the law was not adhered to intentionally. Our legal advisors can provide the appropriate legal guidance in the event of an imposed fine.

Questions regarding tax penalties? Contact us.

Tax penalties and broader tax law

A tax penalty rarely stands alone. It is almost always linked to a tax assessment, a correction, or an audit falling under tax law . Therefore, we assess not only the penalty itself but also the underlying assessment and the procedure followed by the Tax and Customs Administration. Often, the defense against a penalty runs parallel to a process of objection and appeal against the assessment, or to a dispute regarding a tax return filed with the Tax and Customs Administration. In doing so, our mixed teams of lawyers and (corporate) legal counsel serve both the international group with a complex tax structure and the baker around the corner who unexpectedly receives a default penalty.

The legal basis: default penalty and criminal offense penalty

The authority of the Tax and Customs Administration to impose a tax penalty is regulated in the General Tax and Customs Administration Act (AWR). The default penalty is intended for minor offenses, such as failure to file a return or filing it late (Article 67a AWR) or failure to pay tax required by return, or paying it late (Article 67c AWR). There is no requirement for intent to default penalties; they have a statutory maximum that varies per offense.

The misdemeanor penalty is the more severe sanction. It is regulated in Articles 67d and 67e of the General Tax Act (AWR) (and for self-assessment taxes in Article 67f AWR) and can only be imposed if the Tax and Customs Administration demonstrates intent or gross negligence. As a rule, the penalty amounts to 25% of the underpaid tax in cases of gross negligence and 50% in cases of intent, and can rise to 100% in serious cases. Higher percentages apply to undeclared Box 3 income. The difference between intent (knowingly violating the rules) and gross negligence (serious negligence bordering on intent) is legally decisive for the amount of the penalty and is often the core of a defense.

A tax penalty is criminal law: your safeguards under Article 6 ECHR

Legally, a tax penalty constitutes a “criminal charge” within the meaning of Article 6 of the European Convention on Human Rights (ECHR). This means that the same safeguards apply as in a criminal case. The burden of proof for intent or gross negligence rests entirely with the Tax and Customs Administration, which must demonstrate this convincingly; in case of doubt, the benefit of the doubt applies to the taxpayer. You have a right to remain silent (Article 5:10a of the General Administrative Law Act), and the prohibition against self-incrimination means that you cannot be forced to actively cooperate in imposing a fine on yourself. Precisely for this reason, it is advisable to have a legal assessment made regarding which information you are and are not required to provide before responding to questions from the Tax and Customs Administration.

Una via principle: fine or prosecution, not both

For the same offense, the government can choose only one route: an administrative tax penalty or criminal prosecution. This una via principle prevents double punishment. The route chosen is determined on the basis of the Protocol on the Reporting and Settlement of Tax Offenses (Protocol AAFD), taking into account factors such as the amount of damage and the degree of culpability. For the entrepreneur, it makes a significant difference whether a matter is settled administratively or criminally. Our lawyers and (corporate) legal counsel assess this risk early on and, where possible, steer towards the least burdensome route.

Objection, appeal and reduction of the fine

You may lodge a written objection against an imposed tax penalty within six weeks of the date of the notice. In doing so, we assess not only whether intent or gross negligence was correctly assumed, but also whether the Tax and Customs Administration followed the procedure with due care, whether the penalty is sufficiently substantiated, and whether the amount is appropriate. Even if the penalty is justified in principle, there are often grounds for mitigation: mitigating circumstances, a disproportion between the penalty and the offense, the financial situation, or exceeding the reasonable time limit may lead to a lower penalty. If we are unable to reach a resolution during the objection phase, the path to the tax court remains open; we also handle that objection and appeal process

Our approach to a (announced) tax penalty

The sooner you engage us, the greater the scope for action. In the case of an announced fine (the notification), we first assess whether the impending fine is justified and formulate a substantiated response or point of view. We request the file, verify the facts and the legal framework, and safeguard your right to remain silent and your rights of defense. In the event of a fine that has already been imposed, we file an objection in a timely manner, conduct the substantive debate with the inspector, and litigate before the court if necessary. For advisors who are themselves facing a co-perpetrator fine, we provide a separate defense. By combining lawyers, (corporate) legal experts, and tax specialists in a single team, we cover both tax technicalities and procedural and criminal safeguards.

Frequently asked questions about tax penalties

What is the difference between a default penalty and an offense penalty? A default penalty applies to minor defaults, such as filing or paying late, and has a fixed statutory maximum. An offense penalty requires intent or gross negligence and is expressed as a percentage of the underpaid tax.

Within what timeframe must I respond? You must object to an imposed fine within six weeks of the date of issue. You must respond to a notice within the timeframe stated therein; do not delay doing so.

Do I have to answer all questions from the Tax and Customs Administration? Not necessarily. Because a fine falls under the criminal regime of Article 6 of the ECHR, a right to remain silent and a prohibition against self-incrimination apply. Have it assessed in advance which information you do and do not need to provide.

Can a fine be reduced, even if I was in the wrong? Yes. Even with a justified fine, mitigating circumstances, disproportion, or exceeding the time limit can lead to a reduction.