Selling Gold

Authorities crack down on 'Goldfinger' tax evasion

Goldreserven der Deutschen Bundesbank
You don't even have to steal it to save taxes. Source: Bundesbank

No, this is not an article about the James Bond movie, but the details would sure make a good Hollywood script. A notorious tax trick that’s become known as “Goldfinger” may have been far bigger than first assumed. The tax dodge, which used fake gold-trading companies to avoid tax, has prompted massive police raids in recent weeks. Prosecution documents seen by Handelsblatt suggest it involved many tax lawyers and hundreds of clients, and ultimately cost German taxpayers billions of euros.

In the scheme, wealthy taxpayers set up their own gold-dealing companies to have gold transactions reclassified as “professional dealing.” That allowed them to pay a zero-percent professional rate, rather income tax or capital gains tax on their earnings. The loophole was originally legal, but was outlawed in 2013. However, some lawyers involved in the tax avoidance scam kept it up even after it became illegal.

They may now regret that decision. At the end of January, prosecutors in the Bavarian city of Augsburg staged some of the largest police raids in recent German history, with more than 800 police officers searching more than 200 private and business premises in Germany, Switzerland and Austria. The raids led to seven arrests and the seizure of massive quantities of data. Some days later, a lawyer thought to be central to the scam was arrested at Munich airport as he returned from a vacation in Barbados.

“Tax avoidance is never illegal. Do you know anyone who actually enjoys paying taxes?”

tax adviser to several Goldfinger clients

Germans may stereotypically be known for following the rules, but this is hardly the first time that wealthy German clients have been caught using tax avoidance tricks. One of the biggest previous scandals, which also cheated authorities out of billions, has involved using dividend stripping to avoid capital gains taxes. The government and states have also cracked down hard in the past decade on Germans who evaded taxes by setting up bank accounts in Switzerland.

Both parties in the proposed new coalition between the center-right Christian Democrats, or CDU, and center-left Social Democrats, or SPD, are promising a major crackdown on tax evasion under the new administration. The government’s likely new finance minister, Olaf Scholz, may seek to use the issue to raise his national profile, following a similar crusade towards the end of his predecessor Wolgang Schäuble’s term.

“I’m convinced an SPD-led finance ministry will take a decisive stand against tax avoidance,” said Christine Lambrecht, deputy SPD parliamentary leader: “In future, we want to take quicker action against these kinds of avoidance tricks.”

Thought to have been concocted by two Munich-based tax lawyers in 2007, the “Goldfinger” tax trick involved setting up gold-dealing firms in London. As “professional gold dealers” they could buy and sell gold tax-free, thus shielding large swathes of their income and avoiding personal taxation rates of up to 45 percent.

After benefitting personally, the lawyers began reaching out to wealthy individuals, charging them 10 percent of the tax saved by the trick. One tax adviser told Handelsblatt that at least one prominent former politician, as well as well-known figures from sports and business, had benefited from the tax loophole.

13 p05 The Goldfinger trick-01

 

Like many such schemes, the technique was not initially illegal. Its inventors referred to it as “tax design” rather than evasion. And even though it was outlawed in 2013, many still regard it as a legitimate business move. Speaking to Handelsblatt, one tax lawyer who said he had advised numerous Goldfinger clients asked: “Why not? Tax avoidance is never illegal. Do you know anyone who actually enjoys paying taxes?”

The trick eventually came to the attention of politicians and tax authorities. In late 2012, legislation was brought before parliament which would have closed the loophole. However, arguments over the taxation of same-sex couples meant that the year’s entire taxation law was thrown out, giving the Goldfinger trick another year of legality.

German law firms based in London took that opportunity to openly advertise, appealing for new clients to set up as supposed professional gold dealers: “This is undoubtedly a safe, lucrative and quick solution we like to implement for our clients. Act now if you also want to become a Goldfinger,” went one sales pitch.

And so the gold rush continued. In one case, two brothers from a well-known German industrial family saved nearly €100 million in tax through the Goldfinger trick. Tax authorities in the state of Rhineland-Palatinate tried to sue, but the brothers won out in court.

Still, some of those involved continued even after the loophole was closed. Those now under investigation are thought to have skipped setting up gold-dealing companies themselves, preferring to use fake identities and shell companies. Legal action is now proceeding against several tax advisors and around 100 investors.

Sönke Iwersen leads Handelsblatt’s team of investigative reporters. Volker Votsmeier is an investigative reporter with Handelsblatt. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Brían Hanrahan and Christopher Cermak adapted this story into English for Handelsblatt Global.To contact the authors: iwersen@handelsblatt.com, votsmeier@handelsblatt.com, hildebrand@handelsblatt.com

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