Definition: What is meant by retention periods?
The term “retention period” is closely linked to the archiving of documents and defines which documents or which types of documents must be kept in the company and for how long. More precisely, retention periods describe which legal requirements exist for archiving certain business documents. The concrete question is therefore, how long must which documents be archived in the company?
As a basis for the duration of retention, there are clearly regulated and precisely defined requirements by the legislator. Considering the German law, these archiving periods are laid down in the “Abgabenverordnung” (AO) and the “Handelsgesetzbuch” (HGB). The AO deals with the tax law aspect, while the HGB covers commercial law. Particularly noteworthy are § 147 of the AO and § 257 of the HGB.
Table of Contents
- Definition: What is meant by retention periods?
- To whom do the retention periods apply?
- What must be archived and where are the retention periods regulated?
- How long must business records be kept?
- What are the consequences of violations?
- When does the retention period begin?
- Special form of “electronic retention”: What must be observed here?
To whom do the retention periods apply?
According to the German legislator, all entrepreneurs who are obliged to keep accounts according to tax or commercial law must also comply with the retention periods. They are subject to the so-called retention obligation. However, according to § 140 of the AO, “other laws” must also be observed insofar as they are relevant for taxation, for example the Value Added Tax Act (UstG). Depending on the profession and activities, different record-keeping and accounting obligations apply.
In general, the obligation to keep records and thus to comply with the retention periods applies to large corporations just as much as to small businesses. Tradespeople who do not belong to a trading company, for example farmers and foresters, are also obliged to keep records under certain conditions. However, certain turnover and profit limits must be exceeded: Traders who earn more than €60,000 in profit or €600,000 in turnover per year are required to keep records.
Private individuals are also subject to the retention obligation in some cases. In most cases, it is two years and relates primarily to tax-relevant invoices and payment receipts.
What must be archived and where are the retention periods regulated?
As already described, the German legislation makes a distinction between the retention periods according to tax law (§ 147 AO) and commercial law for merchants (§ 257 HGB).
According to tax law (§ 147 AO), the following business documents must be archived in an orderly manner:
- Books and records, inventories, annual financial statements, management reports and the opening balance sheet as well as the work instructions and other organisational documents necessary for understanding these documents
- Received commercial and business letters as well as the reproduction of commercial and business letters sent
- Accounting vouchers
- All documents required under Article 77 of the Customs Code
- Other documents insofar as they are relevant for taxation purposes
The commercial law for merchants (§ 257 HGB) provides for an obligation to archive the following business documents:
- Commercial books, inventories, opening balance sheets, annual financial statements, individual financial statements, management reports, consolidated financial statements, group management reports as well as the work instructions and other organisational documents required for their understanding
- Commercial and business letters received as well as the reproduction of commercial and business letters sent
- Receipts for entries in the books to be kept (accounting vouchers)
Documents not subject to retention
Not all documents produced in the enterprise are subject to retention. For example, certain internal company records, such as work reports or calendars, do not have to be submitted and may thus be destroyed in due time.
How long must business records be kept?
The retention periods for business documents are usually between 6 and 10 years. The following is an exemplary list of which documents must be retained for 6 or 10 years:
6 years retention period
- Documents important for taxation
- Credit documents, if correspondence
- Tax audit reports
- Offers with order sequence
- Commercial letters (except invoices or credit notes)
- Investment allowance (documents)
10 years retention period
- Incoming invoices
- Opening balances
- Fixed asset ledgers and card indexes
- Banking information
- Annual reports
- Operating cost invoices
- Posting documents
- Main financial statement overview
- Trial records
- Export documents
- The decisive factor for the retention period of a document is its function within the company. The designation alone cannot be used to make a statement about the retention period.
- Retention periods can also be extended! This is due to the requirement of documents for tax calculation and depends on the deadline. For more detailed information, contact a legal advisor.
A detailed overview of the main types of documents and their retention periods can be found here: Hamburg Chamber of Commerce – ABC of Retention Periods (German language only)
What are the consequences of violations?
As with all obligations imposed on entrepreneurs by the legislator, there are also consequences for violations. For example, non-compliance with the retention periods is counted as a violation. This can be the deletion of documents that must be archived, even though the deadline has not yet expired, as well as the concealment, destruction or damage of documents. Even if documents are not kept at all, this constitutes a violation of the accounting or record-keeping obligation.
According to case law, the taxpayer has the burden of proof. If the documents required for the tax office are not available or only in a damaged, incomplete form, the tax office can estimate the tax burden. This may then be significantly higher than would normally have been the case. In addition, the following sanctions can also be expected in the event of a breach of the retention obligation:
- Prosecution for insolvency offences
- Prosecution for document suppression
- Prosecution for tax offences or administrative offences
This means that in the case of tax jeopardy and tax evasion, a court can resort to harsher means in addition to fines, i.e. monetary penalties. In the worst case, imprisonment may be imposed.
When does the retention period begin?
In principle, the retention period starts at the end of the respective calendar year in which the document subject to retention arose.
Example “Annual financial statement”:
The annual financial statement for 2021 for the company K. Motors was prepared in June 2022. The starting point for the retention period is therefore at the end of the year 2022 or on January 01, 2023, since the document was only created in the calendar year 2022, although it is a financial statement from the year 2021. The end of the retention period for annual financial statements is after 10 years, in our example on December 31, 2032. Thus, the records may be destroyed on January 01, 2033.
Exceptions exist, among other things, if the documents are still of importance for the tax calculation. If, for example, Mr. K. of K. Motors prepared an income tax return from 2021 in 2022 but did not submit it to the tax office until 2024 due to special circumstances, the deadline is also postponed by two years. In this case, the start date is January 01, 2025 and the end date is December 31, 2034.
Note: For some types of contracts there are special regulations with regard to the retention period. In the case of rental contracts, for example, the starting point for the period is after the end of the contract period and not when the rental contract is concluded.
Special form of “electronic retention”: What must be observed here?
In the course of digitalisation, the form of archiving has now changed in many companies. Instead of mountains of paper and a physical archive, the trend goes increasingly towards digital files. The positive thing about this is that the duration, i.e. the retention periods, do not differ from analogue to digital. However, the assessment basis is different. While the GoB (principles of proper accounting) apply to physically existing documents, the GoBD (principles for the proper keeping and storage of books, records and documents in electronic form as well as for data access) apply to digital documents. They thus extend the GoB by the digital component.
The GoBD are particularly relevant when it comes to the topic of “audit-proof archiving”. Since this topic is very complex and follows precise rules, we have written a separate article on the topic of “archiving”. Among other things, we also discuss what archiving actually means, how digital archiving works exactly and how Microsoft 365 can support you in archiving documents as well as complying with the retention periods.
All information in this article is for information purposes only. It does not constitute legal advice. In particular, it cannot replace individual legal advice that takes into account the specifics of each case. Insofar as we report on cases, in particular court decisions, their results may not be used to infer a necessarily similar outcome in other cases.
We endeavour to select all information provided in this article with care and to update or supplement it as necessary. However, we cannot guarantee that the information in this article is up-to-date, complete or correct. This applies in particular to changes in legislation or case law.
Hamburg, July 06, 2022
Author: Sara Glöckner
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