Sham invoices, cover invoices, straw man invoices and co

Many entre­pre­neurs are confronted at some point in their busi­ness life with the accu­sa­tion by the tax office that they have committed tax evasion by issuing so-called ficti­tious invoices.

The core of the accu­sa­tion with which restau­rant opera­tors, hair­dres­sing salon owners, buil­ding contrac­tors and the like are confronted is often the assump­tion of the tax autho­ri­ties that a service was faked by an alle­gedly performing entre­pre­neur to an invoice reci­pient and that a service was not actually provided.

Further alle­ga­tions focus on the suspi­cion that the entre­pre­neur paid his employees ille­gally and then had another company write ficti­tious invoices in order to claim opera­ting expenses.

What you need to know and how we can help you

Ficti­tious invoices are invoices that simu­late or conceal a specific busi­ness tran­sac­tion.

They are used to mani­pu­late a company’s turnover or costs in order to save or evade taxes. In parti­cular, they influence turnover tax, income tax, trade tax and corpo­ra­tion tax.

Ficti­tious invoices can be used by both invoice issuers and invoice reci­pi­ents to opti­mize their tax situa­tion.

Bogus invoices can take various forms. The most common types include

• Genuine ficti­tious invoices: A company issues an invoice to another company without an exch­ange of services having taken place, so that the invoice reci­pient can wrongly claim a deduc­tion for opera­ting expenses and input tax.

• Circum­ven­ting tran­sac­tions: An invoice is issued to conceal another tran­sac­tion, e.g. the payment of bribes.

• Hidden tran­sac­tions: There is an exch­ange of services between two persons, but for a diffe­rent purpose than that stated in the invoice, e.g. to achieve more favorable taxa­tion.

• Cove­ring invoices: A classic example of this is when an entre­pre­neur pays his employees’ wages in the black and is ther­e­fore unable to claim any opera­ting expenses. To compen­sate for this disad­van­tage, he commis­sions another company to issue invoices for ficti­tious services. The invoice reci­pient can then deduct the ficti­tious invoice as a busi­ness expense and also claim the input tax deduc­tion.

• Straw man invoices: An invoice is issued that speci­fies a false invoice issuer or reci­pient. The false invoice issuer or reci­pient merely serves as a straw man for the company actually provi­ding the service.

• Contracts with close rela­tives: For example, the entre­pre­neur employs his spouse, who alle­gedly does the book­kee­ping, or the self-employed person rents premises from rela­tives and claims these as busi­ness expenses. In these cases, the so-called arm’s length compa­rison must be used to check whether an employ­ment or rental rela­ti­onship exists at all.

• Invoices for favors: The invoice issued contains an unper­formed or exces­sive service, e.g. to provide a busi­ness partner with an advan­tage or to help him.

• Falsi­fied invoices: An invoice is issued that contains a forged signa­ture, a forged date, a forged invoice number or other false infor­ma­tion, e.g. to justify or avoid an earlier or later payment.

§ Section 42 (2) AO high­lights the problem of so-called sham invoices:

“Sham tran­sac­tions and sham acts are irrele­vant for taxa­tion purposes. If another legal tran­sac­tion is concealed by a sham tran­sac­tion, the concealed legal tran­sac­tion is decisive for taxa­tion purposes.”

If the tax office or the tax inves­ti­ga­tion ther­e­fore iden­ti­fies a sham invoice, it is invalid for tax purposes. Conse­quently, no busi­ness expenses and input tax deduc­tions that were claimed on the basis of a sham invoice may be taken into account.

What effect does the disco­very of a sham invoice have?

Being accused of using or recei­ving bogus invoices poses a serious threat to your tax and criminal inte­grity.

The tax office can correct the tax assess­ment and assert considerable addi­tional claims with inte­rest and late payment penal­ties.

There is also a risk of prose­cu­tion for tax evasion (Section 370 AO) or aiding and abet­ting this (Section 370 AO, Section 27 I StGB). The penal­ties can vary from fines to impri­son­ment depen­ding on the seve­rity and scope of the offense. In addi­tion, the repu­ta­tion of the company or person who received and issued the ficti­tious invoices can be perma­nently damaged.

How can we help you?

If the tax office or tax inves­ti­ga­tors discover a poten­tial bogus invoice, you should not panic but seek profes­sional help.

Our law firm Mügge, Dr. Pitschel & Partner specia­lizes in tax law and can ther­e­fore help you in the best possible way to defend yourself against the accu­sa­tion of bogus invoi­cing.

We check the invoices and the under­lying contracts to verify the lega­lity of the service provi­sion.

We repre­sent you vis-à-vis the tax office and the criminal autho­ri­ties and stand up for your rights.

We also advise you on possible volun­tary decla­ra­tions in order to achieve a miti­ga­tion or exemp­tion from punish­ment. We will support you with our many years of expe­ri­ence and exper­tise to offer you the best possible solu­tion.

If you have any further ques­tions or are a defen­dant in criminal procee­dings or tax procee­dings (criminal tax procee­dings), please do not hesi­tate to contact us.