Peter Singh Virdee was arrested earlier this week on a European arrest warrant, Scotland Yard confirmed yesterday.
The Daily Mirror reports Virdee, 43, – who denies the allegations – faces up to 15 years in jail if found guilty.
Businessman Virdee, a visiting professor at Manchester Metropolitan University, handed the Conservative party £98,000 since 2011 through his company B&S Properties.
He was invited to a meal with a senior minister and other donors in 2012.
But German prosecutors say Virdee was one of the “central organisers” of a plan to defraud authorities of VAT on carbon credits under the EU Emissions Trading Scheme.
It is claimed the tycoon worked “in the background” and tried to conceal his identity.
A Metropolitan Police spokesman said: “Peter Singh Virdee, 43, a UK national, was arrested on Tuesday, January 10, at Heathrow Airport.
“He was arrested on a European arrest warrant on behalf of authorities in Germany, where he is wanted in relation to tax evasion.”
Virdee appeared before Westminster magistrates court last week and was granted bail.
Carter-Ruck, the legal firm representing Virdee told the Daily Mirror: “Our client categorically denies these allegations; he has never been involved in carbon trading let alone any kind of fraud.
“While he is happy to co-operate with the authorities he intends to defend himself fully against these allegations and the attempts to extradite him.”
It said the only basis for the allegations was “a statement given by a convicted fraudster who entered some form of plea bargain in return for implicating other people”.