Tax consultants, doctors, dentists, architects, journalists and other freelancers have no other choice. You have to pay into professional pension funds or pension chambers for your pension. But how safe is the money you have saved up when creditors or insolvency administrators want to enforce their claims?
The financial news service GoMoPa.net asked the Munich banking and insurance scholar lawyer Dr. Johannes Fiala (53, photo � Dr. Fiala) for clarification.
Dr. Fiala: “It depends on what the statute says.”
Dr. Fiala can only recommend to every freelancer: “Have a look at the statutes of your pension fund immediately. Your capital is only really protected against seizure before the start of your pension if the seizure of the capital formed by the contributions is directly or indirectly excluded in a legally secure manner.
A non-transferability of the savings capital to third parties or a prohibition of realisation or pledging to third parties, as can be read in many statutes, does not prevent seizure by third parties, as the Federal Court of Justice ruled on 25 August 2004 (file number IX a ZB 271/03). In such a case, any creditor can at least seize the future pension payments of the pension fund even before the pension starts.
One way out would be to go through insolvency proceedings in Germany or abroad, if possible privately, in good time. This can be less than two years, or more than six years, depending on your primary residence. For such cases, of course, special arrangements are needed through agreements with relatives, for example, to secure the necessary war chest for the proceedings.”
GoMoPa.net: What can you do if the attachment protection is missing in the statute, you can’t just resign from the compulsory membership?
Dr. Fiala: “The professional pension funds and pension chambers are public corporations and are under the sovereignty of the federal states. This means that each federal state has its own statutes for the pension funds or chambers. You could open your office where the statute provides better attachment protection.
And: A de facto exit can of course be represented almost completely, if one knows the rules of the game exactly. This opportunity is limited in time. However, the deadlines revive when you change jobs. The older they get, the more interested they are in cleaning up past mistakes and getting proper advice instead of trusting rumors.”
GoMoPa.net: Let’s assume the freelancer has found a pension fund in a federal state with garnishment protection in the statutes, should he now accept the offer, which all pension funds offer, and voluntarily pay in more than the mandatory contribution?
Dr. Fiala: The statutory protection against seizure does protect the capital from the access of creditors and insolvency administrators, but it still does not protect against capital loss. In contrast to the German pension insurance, into which one can pay as a self-employed person voluntarily and with which one receives his money as an insured person by a pay-as-you-go procedure from the generation contract, a payment is based with supply works and/or supply chambers on the procedure of the capital cover.
The funded scheme may also offer the prospect of a negative return. For years, in areas of the global government low interest rate cartel, for example, there has been an expectation of around 1.5 percent returns over the long term. If you subtract brokerage or acquisition costs from this, as well as administrative costs and ongoing inflation, the purchasing power for the old-age pension can easily be halved over the savings period. You won’t hear from any politician that you might have been lucky if more than an estimated half of what you have as a pension ends up economically as purchasing power – compared to what you might have been counting on.
Several pension funds have already reduced entitlements and benefits, or are about to do so. There have been reports in the press about cuts of 30 percent or even over 50 percent, as in the case of a pension scheme for dentists in Lower Saxony in recent years. Such institutions usually inform their members only after the fact that one has invested, for example, in Greek bonds with a capital cut.
Whenever you start out as a freelancer, for example you change your status from employee to self-employed, or you change to a slightly different profession as a self-employed person, you regularly have 5 years to consider. It would be conceivable, for example, to apply for compulsory insurance under the German pension insurance scheme. It would also be conceivable, depending on the statutes, to pay a lower contribution into the pension fund. The federal pension insurance may offer more security or other risks due to the policy. But you can often pay around three times as much into a pension scheme voluntarily.
It would then be a task for an actuary to compare the potential returns and recommend an appropriate spread of risk. Hardly anyone has noticed that some time ago the German government presented a draft law to amend the federal debt system, which also allows a debt cut for German government securities as in Greece. This is a consequence of the European Stability Mechanism (ESM bailout fund) in Luxembourg, so a potential destabilization of German government bonds by the European Stability Mechanism? A rogue who thinks evil of it – a fool who does not investigate the alternative financial centres.”
GoMoPa.net: What does the advertisement with unlimited non-garnishability in Liechtenstein and Switzerland mean for German customers, and why can the German insolvency administrator still execute?
Dr. Fiala: “Liechtenstein has the charm of being able to appoint a revocable beneficiary to a life insurance policy there, usually a unit-linked life insurance policy, at any time. This can be the wife, a boyfriend or girlfriend, even a non-marital partner or a partner. However, it may be legally imperative – after examining the legal situation even at one’s own domicile – to make the beneficiary immediately irrevocable.
As soon as someone tries to enforce against you as a client of the insurance company in Liechtenstein, a change of law automatically takes place. The contract is transferred to the beneficiary. The money is no longer yours. The money is officially gone. They have to take the oath of disclosure, because they have nothing left. No one can execute against the assets of the new beneficiary if you are the debtor. Such an arrangement in Germany, in the event of foreclosure or insolvency, would have been immoral for almost 100 years and therefore invalid. The question will always be whether and to what extent this German legal tradition affects assets abroad and their fate.
The legal background to this in Liechtenstein, as in Switzerland, is a promotion of the insurance industry and a priority safeguarding of old-age pensions. It’s a legal policy decision. In Liechtenstein and Switzerland, people want private pension provision to be protected as a 3rd pillar. In this respect, creditors are in doubt.
In Germany one says: The interest of the creditors takes precedence, also for constitutional reasons, apart from the subsistence level of the debtor. The fact that only a subsistence level can be protected for the self-employed is likely to be a political decision alone.
The question that German savers in Liechtenstein and Switzerland have to ask themselves is: Is this a gift? And do I have to declare this gift in the bankruptcy or the oath of disclosure? Do I have to report this gift to the tax office and pay tax on it? Are there any special features in the case of spouses and is there any scope for legal arrangements for optimisation, which I will not be able to obtain in a cabinet abroad?
To ensure that nothing goes wrong here, i.e. that a transfer of assets from X to Mrs. Y also runs cleanly and legally for the German authorities as a gift, a structure is required which, in Liechtenstein as in all foreign financial centres, cannot be obtained off the peg either from banks or from insurance companies. Of course, there are experts in foreign financial houses who may be tax advisors or lawyers – but unfortunately their opinions almost never deliver what they promise.
The employees there usually only have a half-understanding of German law, especially German private international law, which provides the answer to the question of which legal system is now applicable – or perhaps even whether two legal systems are applicable, and possibly with irreconcilable contradictory results. As practice shows, German tax law is certainly an area in which foreign advisors can hardly move safely, even if international financial houses would like to present it differently.
By their very nature, foreign financial institutions are also concerned with their own business. They are mostly indifferent to the consequences in Germany, often not particularly interested in them. One speaks among German lawyers already of: It is gewulfft. Such a foreign off-the-shelf offer is regularly a fire hazard for German customers. The donor and the donee are jointly liable for gift taxes in Germany. You may even be accused of tax evasion. This is for many bona fide customers later a bitter disappointment, because the repair of unsuccessful designs then often costs a multiple compared to a clean previous accompaniment.
The salvation would be for example the following individual arrangement variant: There is the possibility between spouses to give away every 10 years an allowance of half a million euro tax-free. In the case of a girlfriend, you would have an allowance of 20,000 euros. This also requires a prior internal agreement between the parties. Such allowances can be legally multiplied by clever arrangements.
A second house number would be to pay, as it were, a mostly tax-free alimony in lieu of the gift. Only later to set up any suitable contracts for this, holds the danger that the tax authorities do not recognize these and the case lands completely unnecessarily on the table of the public prosecutor’s office.
Non-garnishability means that there is nothing left to garnish. How much of this must be stated to the insolvency administrator or the bailiff in the oath of disclosure requires prior arrangement. That’s because every creditor, every bankruptcy court, and every receiver will be interested in gifts from the last four or ten years. Sometimes it’s wise not only to settle things in good times, but also to give something away in time with warm hands.”
There is no need to fear for one’s assets in Liechtenstein in the face of a German enforcement order.
Dr Fiala continued: “The four principalities of Liechtenstein, Monaco, San Marino and Andorra have not concluded any enforcement agreements with Germany. Foreign judgments are not recognised. The creditors would have to sue again in Lichtenstein, for example, which would make things very expensive for the creditors. However, whether this could ultimately be successful in individual cases requires prior examination, because the deadlines for actions for avoidance, for example, can be quite different depending on the constellation. It does not necessarily have to be a financial centre in Europe.
Of course, the foreign financial houses know about their location advantages and sometimes demand exorbitantly high fees and commissions from their customers, not only when investing untaxed money. But even abroad, there can be exorbitant differences between the various banks and insurance companies. There are banks that are rumored to belong to the mafia, but also absolutely reputable houses – so you can’t call any financial center criminal across the board. Rather, it is important to carefully examine the financial houses and places that come into question in good time.
If, for example, you want to put 10 million euros in safety, as it were, and if these 10 million are all you have, you should never leave them with just one bank and never with just one financial centre. Otherwise, you’ll end up with no war chest, which should never happen. Experts refer to this as geopolitical dispersion. For some financial centers, you always have to travel in person – for an account in Beijing, for example, you may not even have to travel at all.
But what still needs to be said about the Liechtenstein financial centre, for example. Experience says that money has disappeared, embezzled and misappropriated. However, this has also occurred in Germany in connection with account statements that have been falsified for years. As a customer, you have to protect yourself from this. This means that the asset manager usually receives perhaps 0.5 percent of the sum insured for doing nothing.
Should the asset manager embezzle a million euros or more in a larger entrusted protection, one has the problem in Liechtenstein that the 180 lawyers there almost all know each other. Some trustees are lawyers. Few lawyers will take sustained action against another.”
GoMoPa.net: Is there a solution against a possible embezzlement in Liechtenstein?
Dr. Fiala: “Yes, there are. You need to put a trusted third party as a neutral third party between you and the insurance company, asset manager or bank, without whose approval nothing will happen. Then nothing should happen if the residual risk is covered by fidelity insurance. This risk is not initially a country risk, but a risk that is assessed differently by insurance companies from one financial institution to another worldwide. Of course, good fee-based advisors know things that aren’t in the press and haven’t come up with insurance companies yet.”
GoMoPa.net: What are the pitfalls in Switzerland?
Dr. Fiala: “In Switzerland, similar to Liechtenstein, there is unit-linked life insurance and a cash deposit with beneficiaries, but also classic life insurance. However, only spouses and children may be beneficiaries, provided that bankruptcy protection plays a role. Girlfriend, boyfriend as well as partner drop out.
And now I’m going to give you some insider knowledge on this that may be little known. Not every German is treated equally in Switzerland. If a German lives in Munich, his assets in Switzerland are not necessarily subject to Swiss insolvency law.
Some Swiss cantons have agreed ancient interstate law with areas in Germany. This right is about 200 years old and is still used today. This can lead to nasty surprises.
I am aware of a case in which a managing director of a German GmbH transferred the reinsurance of his pension commitment to Switzerland. Half a million euros. The GmbH went into insolvency. Nobody in Germany cared about Swiss pension assets.
Two years after the German GmbH insolvency proceedings ended, a letter arrived from Switzerland: We provide the money. A supplementary insolvency was initiated after completion of the company liquidation, an insolvency administrator was again appointed and the
Money distributed to creditors.
With this private international law, you need knowledge of geography. For example, only part of Baden-Württemberg has such an ancient treaty with Switzerland. A few kilometres further on, this interstate law does not apply again. In Switzerland, therefore, one has to look very carefully at the notion of non-attachment.
However, Switzerland is considered by some advisors to be more reputable and better performing than perhaps some other financial centers in the world because of suspected lower financial crime and possibly better insurance. To get the same thing in Liechtenstein, you may have to spend more money because the design may seem more elaborate at first – but it always depends on the individual case and may look quite different.”
GoMoPa.net: How do you see the problem of tax honesty in dealing with the tax office?
Dr. Fiala: “This is a very important point, because the Federal Court of Justice has repeatedly ruled that there is no staged or partial voluntary disclosure – this would then be ineffective. Also, with seven-figure evasion, a sentence without jail time instead of probation is hardly an option. It is therefore imperative to check all tax contingencies before concluding any contracts. This is a bitter disappointment for one or the other person concerned, because consultancy fees are certainly due for this.
On the other hand, the bazaar is opened to negotiate terms with financial houses abroad. Anyone can have a withholding tax deducted in certain EU countries. If there is then no longer any church tax liability and there are no other special circumstances (for example, extraordinary tax burdens, obligation to pay contributions as a voluntarily insured person in the statutory health insurance GKV), this can also avoid any obligation to declare. Unfortunately, you still have to check all receipts or have them checked, because the EDP of the financial houses can still work incorrectly at home and abroad, which could bring considerable disadvantages.
So control is often helpful or necessary in this area as well. I suspect, based on expert findings, that only a small fraction of the software in use by financial houses actually computes correctly everywhere. Unfortunately, it initially costs customers extra money to monitor this on an ongoing basis, but may then suggest a change of contractor before major damage occurs. The Englishman describes this aptly, “There is no free lunch.”
GoMoPa.net: What do you think of UK fairness life insurance?
Dr. Fiala: “For this to happen, British fairness must first apply. Let’s take Clerical Medical insurance. Numerous intermediaries promised a fabulous return of remembered 12 to 14 percent a year with profits and risks according to British fairness. Clients then often financed hundreds of thousands of additional funds via Swiss franc loans or YEN loans for an investment. Instead of effortless wealth through an immediate annuity, investors expected bitter disappointments and dramatic losses, even over-indebtedness. This insurer was later successfully sued repeatedly.
What no saver (not even the intermediaries) knew was that German insurance contract law applies to this insurance. They were not contracts in British fairness. German courts have jurisdiction to say how the contract documents should be interpreted. The customers simply bought off the shelf and were not properly informed by their future opponent or contractual partner.
It is not only recently that intermediaries have to point out legal and tax risks – however, no training for these professions is required by law. Doubters are not welcome in the sale of financial products. Clients are therefore well advised to secure external fee-based advice before falling in blind faith.”
Foundation not recognised in Liechtenstein
Dr. Fiala continues: “How cruel it can be for German clients when, for example, Liechtenstein or any other country and Germany have a different interpretation of the law is shown by a recent example at the Higher Regional Court in Stuttgart.
A man had set up a foundation in Liechtenstein before his death, among other things, unfortunately, to evade taxes. The money should go to another person, not to the normal heirs.
The court in Liechtenstein said: For us it is okay. It is of no interest to us whether the founder has evaded taxes in Germany.
The German court said the tax evasion is so intolerable, we do not recognize the foundation. Without the foundation, German law now stipulates that the assets must go to the legal heirs. The will of the deceased did not work out, the person he favored got nothing.
If the deceased had had the foundation agreement examined by a German advisor from a tax point of view and in accordance with German private international law, and had made an arrangement which left the German tax authorities out of the equation, then the foundation would also have been recognised in Germany. Of course, such advice is not to be expected from a Liechtenstein asset manager, and why should it be?
So with every contract you have to make sure that you observe German private international law and German tax law if you don’t want to experience any nasty surprises afterwards or have to turn over in your grave later on.”
GoMoPa.net: What recommendations would you like to give to those affected here?
Dr. Fiala: “From a tax point of view, it is important to declare everything mercilessly, because tax honesty with creative advisors can lead to massive and legal savings in the end. In the case of pensions and asset protection, it is necessary to examine various levels: The products, the financial centres, the financial houses, the advisory expertise and the associated model designs.
Anyone setting up a pension scheme should be familiar with the statutory options and then be able to make a qualified decision. This concerns, for example, the differences between funded and pay-as-you-go systems. Moreover, it need not be necessary to go abroad at first to obtain insolvency protection, especially if there are friends and family around. Due to dubious investments, investors lose around 30 billion euros annually, and due to incorrect or missing advice, it is estimated that far more than 50 billion euros are destroyed every year. Therefore, regardless of commissions, it is always important to get at least a second opinion in time.
As long as clients (without realising it) prefer to pay 60,000 euros in commissions instead of 20,000 euros for fees, consultants will later have to charge many times that amount for often costly repairs. As the saying goes, “You made your bed, now sleep in it.”
GoMoPa.net: Dr. Fiala, thank you for the interview.
Dr. Johannes Fiala
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About the author
Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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