Lawyer at VAT carousel

VAT carousel: What you should know if you are accused of tax evasion

VAT carousels are a form of tax evasion that often presents significant challenges for investigating authorities to uncover. Those found guilty can face criminal consequences such as heavy fines or prison sentences. If you are accused of participating in a VAT carousel, swift and competent legal action is crucial.
The VAT carousel is based on systematic fraud in intra-community trade within the EU.
It exploits VAT mechanisms, particularly tax-free deliveries to other EU countries and the refund of input tax. Several companies – often including shell companies – are part of this fraudulent scheme, which aims to avoid paying the VAT actually due and generate illegal profits.

How does a VAT carousel work?

The VAT carousel is based on the principle of moving the same goods in a circle between the same or nearly identical companies – similar to a carousel. These often involve high-priced, easily transportable goods such as smartphones, computer chips, or CO₂ certificates, which can be traded quickly online.

A simplified example to explain the VAT carousel

• Company X from the Netherlands sells a supply of electronic components (e.g., memory chips) to Company Y in Germany. The sale is tax-free because it is an intra-Community supply.
• Company Y (in Germany) acts as a "missing trader" or middleman. Y sells the memory chips to Company Z, also in Germany, and issues an invoice that includes 19% VAT.
• Company Z purchases the memory chips and pays the net amount plus 19% VAT to Y. However, Y does not pay the VAT received to the tax office, but illegally retains the money.
• Company Z sells the memory chips to another company (e.g., a final distributor or intermediary abroad) and issues a proper invoice. Since this is a tax-free delivery abroad, Z is not required to charge VAT.
• Company Z applies to the German tax office for a refund of the input tax it previously paid to Y. Since the tax office assumes that the transactions were processed correctly, the input tax is refunded to Z.
• The memory chips return to the original seller, Company X in the Netherlands, through further international trade relations, and the “carousel” begins again.

How does the profit from the VAT carousel arise?

• Company Y retains the collected VAT without paying it.
• Company Z benefits from the input tax deduction even though the actual tax was not paid.
• The profit arises from the multiple “refunded” input tax, which is divided between the participating companies.
• The “carousel” rotates through repeated, rapid transactions. 

Why is enlightenment so complex?

• Long supply chains with many participants who take on different roles such as buffer or distributor.
• Missing Trader: The central problem in the investigation
• A crucial element of the VAT carousel is the “missing trader”. 
• These are usually so-called shell companies that disappear from the market after several rounds of fraud before the authorities can uncover the fraud. 
• Cross-border trade involving different national tax authorities.
• Unobtrusive participants: Many companies that act as intermediaries appear inconspicuous at first glance, making it difficult for authorities to prove their actual role in the fraud scheme.

VAT carousel and criminal consequences: How do I commit a criminal offense – for example, as an influencer, subcontractor in construction, or managing director of an involved company?

Criminal liability of the “missing trader”: tax evasion according to Section 370 para. 1 AO

• Its task is to ensure that the collected sales tax is not paid to the tax office. 
• According to Section 370 Paragraph 1 of the Tax Code (AO), this constitutes tax evasion.
• In addition, the missing trader can also be prosecuted for forgery under Section 267 of the German Criminal Code if he creates or manipulates false supplier invoices in order to conceal the fraud.

Criminal liability of the “buffer” and “distributor”: tax evasion through input tax fraud

• The buffer (intermediary) and the distributor (processing company) also bear responsibility, even if they correctly declare their sales and properly pay the applicable taxes. 
• Your criminal liability arises from input tax fraud:
• Accusation: They claim input tax from the tax office even though they know that they are part of a VAT carousel and that the missing trader will not pay the VAT.
• Legal basis: Section 370 paragraph 1 AO (tax evasion) also applies here.

If you are accused of VAT carousel fraud, swift action is essential. Tax criminal lawyers can analyze your situation, assess potential liability risks, and develop an effective defense strategy. In any case, please do not make rash statements without legal advice!

What penalties are there for participating in a VAT carousel?

Participation in a VAT carousel is subject to severe criminal penalties, as it is generally considered tax evasion. The specific penalties depend on the extent of the offense and the individual circumstances.

• Tax evasion according to Section 370 Paragraph 1 AO

• As a rule, tax evasion threatens:
• fine or
• Imprisonment of up to five years

• Particularly serious cases: imprisonment of up to ten years

According to Section 370, Paragraph 3 of the German Fiscal Code (AO), particularly serious cases of tax evasion are punishable by imprisonment of six months to ten years. Particularly serious cases exist if:

• Unjustified tax advantages were obtained on a large scale: According to case law (Federal Court of Justice, judgment of 27 October 2015 – 1 StR 373/15), an amount of EUR 50,000 or more is generally considered to be “on a large scale”.
• Participation as a member of a gang is proven: A gang exists if you have joined forces with at least two other people to repeatedly commit tax crimes over a certain period of time.
• Important: The examples listed in the law are not exhaustive. Particularly serious cases may also exist in other constellations. 
• At the same time, the court is not obliged to accept it automatically, even if the above conditions are met.

• Forgery of documents according to § 267 StGB

If false or manipulated invoices were issued as part of the VAT carousel, forgery may be considered. This could result in:

• Imprisonment for up to five years or
• fine
• However, in cases of aggravating circumstances, such as commercial forgery or gang-related crimes, higher penalties may be imposed.

The right defense can have a decisive impact on the outcome of a tax criminal case. Therefore, contact us promptly so we can best represent your interests.

Repayment of tax benefits for participation in a VAT carousel: What happens to the illegally obtained profits?

Anyone who obtains illegal tax advantages by participating in a VAT carousel must prepare for significant financial consequences. The illegally obtained amount will be consistently claimed under both criminal and tax law.

• Confiscation of profits by the court
• In criminal proceedings, the court orders the confiscation of the illegally obtained tax benefits. 
• This means that the profit made from the carousel must be paid back in full. 
• The confiscation is intended to prevent the perpetrator from profiting financially from the crime.
• Tax consequences: Repayment of input tax

From a tax perspective, the unlawfully claimed input tax amounts will also be retroactively revoked. This results in:

• The input tax deduction is reversed.
• The wrongfully refunded amounts must be repaid to the tax office with interest.
• High interest rates and possible additional payment surcharges can make the repayment even more expensive.

• Avoid double financial burden
• Since confiscation by the criminal court and recovery by the tax office can take place in parallel, there is a risk of a double financial burden. 
• An experienced tax criminal lawyer can examine whether it is possible to offset the repayments in order to avoid excessive claims.

Unwittingly involved in a VAT carousel: Is ignorance punishable?

Even though the principle "ignorance is no excuse" generally applies, participation in a VAT carousel is not automatically punishable. The crucial point is whether a company knew or should have known that it was involved in such a fraudulent scheme.

• No automatic criminal liability for tax evasion
• The mere fact that a company is part of a VAT carousel does not justify a conviction for tax evasion. 
• It may well happen that a company is unknowingly involved, for example through faulty supplier audits or false information from business partners.
• BGH and ECJ: When is knowledge or negligence decisive?

According to the judgment of the Federal Court of Justice (BGH, judgment of 17.12.2014 – 1 StR 324/14), criminal liability depends on whether:

• the company knew or should have known that it was part of a VAT carousel.
• It is up to the authority to provide this evidence (ECJ, Case C-80/11 of 21 June 2012).
• If knowledge cannot be proven, there is a possibility that instead of tax evasion, there is reckless tax evasion according to Section 378 of the Tax Code.

• Reckless tax evasion: A negligent alternative to tax fraud
• Reckless tax evasion occurs when an entrepreneur negligently fails to recognize that he has made false statements or obtained unlawful tax advantages. 
• In this case, there is no risk of long prison sentences, but heavy fines can be imposed.

Protection against unwanted participation in a VAT carousel: Important precautions

To protect themselves from unknowingly or unintentionally becoming involved in a VAT carousel, companies should conduct targeted audits and take precautionary measures. These help identify suspicious trading practices early and minimize potential risks.

• Beware of strikingly low prices or “bargains”
• Be especially careful if you are offered goods at unusually low prices or well below market value. 
• Such offers may be an indication that the supply chain is not reputable or could be part of a VAT carousel.
• Distrust of random and repeated trading patterns
• If you are offered goods for sale in exactly the same quantity that you just bought from another retailer, you should be suspicious. 
• Also look for repeated trading patterns with identical products, quantities and the same business partners.
• Tip: Check the serial numbers of goods randomly to ensure that there are no counterfeits or fraudulent items.
• Checking the reliability of the contractual partners
• If you have doubts about the trustworthiness of a business partner, you should verify the identity and address of the company. 
• You can do this by visiting the business address or doing an online search.
• Obtain external confirmation
• It is advisable to involve another person in the review. 
• This can document and confirm the results of the test, which can serve as evidence in case of doubt.

Early detection of suspicious patterns protects you not only from criminal prosecution but also from significant financial losses. A systematic review process and contact with an experienced criminal tax law attorney can help identify potential risks and respond in a timely manner.

Tax criminal lawyer: Competent defense in cases of suspected participation in a VAT carousel

A VAT carousel is one of the most complex fraud schemes in tax law. Companies or individuals involved in it quickly find themselves facing accusations of tax evasion under Section 370 of the German Fiscal Code (AO). Whether through knowing participation or unwitting involvement, the consequences can be serious and result in heavy fines or imprisonment.

How we support you as lawyers in tax criminal law:

• Examination of the evidence:
• We examine the investigation file and check whether the allegations made are legally tenable. 
• It is often possible to uncover weaknesses in the authority’s evidence.
• Strategy development:
• Depending on whether the suspicion is of unwitting involvement or intentional participation, we develop the appropriate defense strategy. 
• In cases of unwitting involvement, we aim to have the proceedings discontinued or to impose the most lenient sentence possible.
• Avoiding high penalties:
• Our goal is to protect you from high fines or prison sentences. 
• We are examining whether reckless tax evasion under Section 378 of the German Fiscal Code (AO) can be claimed instead of the more serious tax evasion in order to reduce sanctions.
• Support with input tax refunds:
• Since wrongly claimed input tax amounts are often retroactively revoked and reclaimed with interest when participating in a VAT carousel, we examine the amount of the additional claims and advocate for fair repayment terms.

Don't wait until it's too late. Schedule an appointment now with our specialized tax criminal law attorneys. Together, we'll develop the best strategy to protect your rights and minimize the consequences as much as possible.

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