A friend of mine owns a company in the UK. I live in Germany. He wants to transfer some money into my bank account in order to not pay as much tax when the taxation stuff is done, and afterwards, he wants to transfer the money back.

This seems illegal to me, but he insists that it's legal as long as I say "it was a gift". But this is still wrong to do. Am I correct?

  • Actually, of course, there is nothing illegal about receiving a loan as long as you don't tell the authorities "it was a gift". Mar 25 '17 at 22:53

This is probably a scheme designed to avoid a tax of some kind (or perhaps to conceal the fact that no taxes were reported in income from the asset).

My first guess would be that it would be to evade a wealth tax on net worth assessed on a given date each year, but Germany's wealth tax was struck down in violation of the German constitution in 1995.

Another possibility is that what is being called a "gift" to you is being reported as an "expense" or capital investment in a depreciable asset, by him or one of his companies, thereby reducing an income tax burden.

On one hand, if this isn't truly a gift and you cooperate by receiving the asset and then returning it, you are at a minimum you are knowingly conspiring to participate in evasion of German or UK taxes (which is a crime for both of you, one that Germany is unlikely to seek your extradition to prosecute if the taxes evaded are German, but the UK would prosecute if the taxes evaded were UK taxes).

At worst, are engaged in money laundering which might be prosecuting as a crime in the U.K. too. Money laundering is basically concealing the source, ownership or purpose of assets to evade some other law, and is a crime.

For example, the story about reducing taxes might be a lie and the true reason might be to hide assets from a creditor, a divorcing spouse, or assets obtained illegally through a criminal enterprise. The fact that he was really doing something more than evading taxes wouldn't be a defense if he was really doing something more nefarious, as you still knew that the money was being laundered.

Even if it was found to be merely a "fraudulent transfer" to you while he was insolvent, rather than true money laundering, someone could still sue you to get the money improperly transferred to you back, possibly together with legal fees and costs and interest and civil penalties.

On the other hand, if it is a true gift (and your friend would be in no legal position to argue otherwise), you could alway just keep the money he gave to you with an understanding that it be returned, although that would be a betrayal of his trust, arguably an act defrauding him which he could complain against you criminally for (even if he couldn't sue to get the money back), and at a minimum would permanently destroy the friendship.

Overall, the safest course of action would be to decline to participate in this arrangement as it is probably illegal.

  • If there is a tax on gifts and they both pay it, it's hard to argue money laundry. There is no concealment component of the crime in that case. Mar 27 '17 at 3:04

If your friend moves money from his personal account to your personal account, that doesn't avoid any taxes.

If your friend moves money from his company's account to your personal account, that doesn't avoid any taxes, unless he tells HMRC some serious lies which would make it tax evasion.

An interpretation of what he wants to do that is legal would be his company giving you a loan, and then you repaying the loan. That has no influence on his tax bill whatsoever. A less likely interpretation would be that his company is paying you a dividend. For that you would have to own some part of the company, and even then it is very unlikely that HMRC would accept this. A third interpretation is that you performed services to the company and got paid; that would indeed save taxes, but since you didn't do this, and you didn't actually get paid, it is tax evasion.

Now if you do as he says and accept the money as a gift, and he tells HMRC that his company gave you a gift, then he will be in for a surprise. The company cannot make gifts. They will interpret this as the company paying him a dividend, with the appropriate taxes to be paid (the company has to pay full corporation tax, and then he pays the appropriate tax on dividends), and a gift is a gift, and if you value the money more than your friendship, then you just keep the money.

  • A payment is not a dividend if it is made to someone who does not have any equity in the company. In fact, it's not a dividend if a similar payment is not made to everyone who has the same level of equity. Mar 27 '17 at 2:58

I don't see why your friend could legally reduce his tax liability by gifting to you. He could lower the inheritance tax liability of his successors, if the gift is an exempted gift. Moreover, you could be liable to pay tax in Germany on that money. Finally, where the donor wants the donee to give back the money, it doesn't seem to be gift at all. Arguably it was a loan free of interest and the gift was the opportunity to invest the money and earn interest on it. I don't think, however, that this is a gift under English law.

  • Well put! I don't think you can reduce tax liability by loaning money to people or there'd be a lot more loans.
    – dsolimano
    Mar 24 '17 at 15:07
  • I believe that Germany has a tax on net worth that the UK does not (most Germanic language countries in Europe do), based on assets owned on a given date in each year. So the transfer as of the net worth valuation date would reduce his net worth tax liability.
    – ohwilleke
    Mar 24 '17 at 21:22
  • Correction. The tax on net worth in Germany was abolished in 1995.
    – ohwilleke
    Mar 24 '17 at 21:40

Accept the money and then keep it. For it to be a gift he cannot put any conditions on it, he certainly can't require you to return it. A gift comes with no strings attached.

What he is proposing is illegal tax evasion and if you agree with it you are breaking the law as much as he. English jails are not to bad I hear.

  • Upvote! I got -2 for a similar answer. The internet is weird sometimes.
    – dsolimano
    Mar 26 '17 at 21:18
  • @Dale M A gift can be made on conditions. Mar 27 '17 at 6:24

If the "gift" is given with expectation of repayment, then (as many pointed out) it is a loan. But such expectation can only be established with a formal agreement. It's not illegal to exchange gifts. Nor is it illegal to return gifts. If there is a mutual understanding, then you both better be sure the "gift" is not collateralized in any formal way. Otherwise, instead of being a collateral on a loan, the 2 gifts become 2 purchases with a tax due on each one. You should also make sure there is no tax on gifts in either jurisdiction. Or, more precisely, that the taxes on 2 gifts do not exceed the taxes which would have been due if the money stayed in place. But the main question of whether accepting and returning a gift is illegal, is "probably not". And as long as nothing establishes any legal claim on your friend's part to that money at a later date, it is a gift rather than a loan.

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