Most important effects

• Increased and extensive requests for emails: We expect that the tax authorities will increasingly request all tax-relevant emails during tax audits. They will aim to critically examine and, if necessary, attack the functional and risk profile of German group companies. Taxpayers must review their email communication and qualify it according to tax relevance at the latest at the request of the tax audit.
• Take preparatory measures: The decision suggests that companies, such as German subsidiaries of international groups, should consider setting up a system that either qualifies emails as relevant or not relevant for tax purposes as soon as they are sent or that ensures that the information expected by the tax office in the emails regarding the company’s functional and risk profile is sufficiently documented outside of the email traffic. In our opinion, the submission of all emails of all employees during the entire audit period should in any case be disproportionate if the functional and risk profile of the company is evident from proper transfer pricing documentation.
• Retain emails: Emails (and any other electronic communication) may qualify as commercial and business letters or be otherwise relevant for taxation purposes. Commercial and business letters and other tax-relevant documents in the form of emails, messenger and chat messages or other forms must be retained for a minimum period of six years (Section 147 para. 3 sentence 1 AO). This minimum period is extended if and as long as the assessment period for the taxes for which the documents are relevant has not yet expired.
• In particular, retention of performance records: The focus of the decision was on the verification of services rendered by the taxpayer. Where possible, taxpayers should try to retain evidence of services provided outside of the email documentation.

In detail

Background

For some years now, the tax authorities have regularly requested the submission of all employee emails for the entire audit period during tax audits. The tax authorities are not only interested in the content of the requested messages. They also want to determine the communication structure of the companies and thus the network profiles of associated companies. Based on this network profile, the tax authorities in turn want to review the functional and risk profile of the German group company and replace it if necessary. As a rule, this also calls into question the chosen transfer pricing method. Also for this purpose, the tax authorities also require the submission of a so-called overall journal in tax audits. This should catalog all emails, including those that are not relevant for tax purposes. Firstly, the overall journal should make it easier to identify interesting emails. Secondly, the tax authorities want to ensure that all tax-relevant emails have actually been submitted.

The tax auditors base their request for submission on Section 147 para. 6 AO in conjunction with Section 147 para. 1 nos. 2, 3 and 5 AO. According to this, commercial and business letters received or sent as well as other documents must be retained insofar as they are relevant for taxation purposes. If the documents are stored electronically, the tax office has the right to view the data or have it made available as part of an external audit. The request for submission is usually justified by the fact that the tax auditors want to review the accounting or the group transfer prices. This was also the case in the case underlying the decision.

En bloc request for all emails is permissible, provided it is limited to tax-relevant emails

The BFH initially based its decision on its case law, according to which the request for documents “en bloc” in external audits is permissible and does not violate the requirement of certainty under tax law. En bloc requests are those in which the tax authority requests all documents of a certain type or on a certain topic. According to the tax law requirement of certainty, an administrative act, in particular a request for cooperation, must be determined in such a way that the taxpayer can recognize what is intended. In the case decided, the BFH took into account several specifics of the request for submission: The request for cooperation referred to a specific intra-group service agreement between the taxpayer and a foreign group company, under which the taxpayer had to provide services in the area of sales and marketing. Furthermore, the BFH considered the following points to be a specification of the request for submission:

• Restriction to correspondence on transactions that must be recorded and
• Documents to verify the completeness and accuracy of the bookings and records.
• Requesting only tax-relevant e-mails.

This means that the request to submit all emails from all employees during the entire audit period is generally permissible. However, this obligation to produce only applies to emails that qualify as commercial and business letters or that are otherwise relevant for taxation purposes. The taxpayer, who has the so-called right of first qualification, primarily decides which emails fall into this category.

Emails can also be commercial and business letters

According to the ruling, emails can be either commercial or business letters (Section 147 para. 1 no. 2 and 3 AO) or so-called other tax-relevant documents (Section 147 para. 1 no. 5 AO) that must be retained and submitted.

The term “commercial and business letter” is not defined under tax law. With recourse to Section 257 Commercial Code (HGB), it is to be understood as those documents that relate to a commercial transaction within the meaning of Sections 343 ff. HGB. This is the case if they relate to its preparation, execution or rescission. In the opinion of the BFH, this also includes acts of fulfillment. In commercial law literature, it is disputed whether acts of performance are to be regarded as commercial transactions. In the opinion of the BFH, however, acts of performance are in any case used to carry out a commercial transaction and are therefore to be understood as commercial and business letters.

The tax court had based its assessment on instructions within the scope of a commercial transaction or information provided. Therefore, if a German group company provides services on the instructions of a foreign group company and these instructions are issued by email, these emails should, in the opinion of the tax court, count as documents that must be retained and therefore submitted within the meaning of Section 147 AO. However, the BFH did not consider this to be the case.

Whether a letter qualifies as a commercial and business letter must first be assessed by the taxpayer. The BFH grants it a so-called “right of first qualification” in this respect.

Messenger and chat messages may also be subject to submission and retention requirements

The classification as a commercial or business letter does not depend on the external form. Emails can be commercial or business letters in the same way as traditional paper letters. Even if the BFH does not mention it, any other electronic messages can also be commercial or business letters if the content is appropriate. This also applies in particular to messenger messages (WhatsApp, Signal, Telegram or similar), chat messages (Teams, Slack, Stackfield or similar) or messages via social media. Such messages must also be selected if the content is appropriate.

As with commercial and business letters, the taxpayer must first assess whether they are relevant for tax purposes. The so-called “right of first qualification” also applies in this respect.

Commercial and business letters and other tax-relevant documents in the form of emails, messenger and chat messages or other forms must be retained for a minimum period of six years (Section 147 (3) sentence 1 AO). This minimum period is extended if and as long as the assessment period for the taxes for which the documents are relevant has not yet expired.

No publication of an email journal

The BFH ruled that the request to submit an overall journal in the form of a list of all emails, including those not relevant for tax purposes, was unlawful.

This is because taxpayers are not obliged to create such a journal as part of their record-keeping obligations. Consequently, he is neither obliged to keep nor to disclose such a journal. Furthermore, the list, as requested by the tax office, would also contain emails that are not relevant for tax purposes. For this reason too, the request for a complete journal is inadmissible. Finally, according to established case law, the right of first qualification to hand over tax-relevant documents lies with the taxpayer.

It is irrelevant whether the tax office claims that it can only verify the exercise of the right of first qualification by the taxpayer with the help of a complete journal. This does not constitute a legal basis either.

Also documentation on transfer prices

The case in question involved the review of transfer prices. In transfer pricing cases, the taxpayer may already be obliged to prepare and submit special records in accordance with Section 90 (3) AO in conjunction with the Profit Accrual Recording Regulation (Gewinnabgrenzungsaufzeichnungsverordnung).

The BFH first clarifies that transfer pricing documentation is also other documentation relevant for taxation. Insofar as they are created, they are therefore also subject to retention.

Furthermore, emails, insofar as they are relevant for the transfer pricing documentation, should also be subject to retention and, if applicable, submission in accordance with Section 147 (1) no. 5 AO. The BFH thus sees a clear coexistence of the special documentation and submission obligations under Section 90 para. 3 AO and the general retention obligations under Section 147 para. 1 no. 5 AO. Subject to examination in individual cases, it can be assumed that significant emails that directly substantiate statements in the transfer pricing documentation must be retained.

Taxpayers are still free to decide for themselves which emails are required to verify their chosen transfer pricing method as part of the initial qualification process. However, further discussions with the tax office are inevitable, at the latest if the e-mails submitted do not justify the additional result sought by the tax office.

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