Income tax for bogus return in Phoenix case ?

The case “Phoenix” calls the tax office on the plan, the investors have first of all lost their deposits in the investment model. Now there is also the threat of taxation on funds that have never been returned to the investors.

A commentator of “FONDS professionell” reminds of another case in which funds were not invested “without the knowledge of the investors” but served to finance a pyramid scheme. The most prominent decisions were made by the tax courts on the Ponzi scheme in the case of “Ambros S.A.”.

In essence, the Federal Fiscal Court (Bundesfinanzhof, BFH) considers it sufficient in principle that the investment company issues a “credit note”. As long as this “credit” appears in the books of the investment company “from the investor’s point of view” as the possibility of a payment to him, a tax liability is to be assumed.

Sufficient is therefore the (theoretical) possibility to dispose of the (possibly fictitious!) credit balance without further ado.
At the level below the BFH, this is sometimes seen differently, because the repayment of funds never really invested – by the investment company for the investor – cannot be investment income. There are, however, several gateways to discussions with the tax office:

(a) it is necessary to examine carefully which part of the repayments to the investor is to be regarded as a taxable return and which part is to be regarded as a tax-free repayment of capital.

b) In the case of investment fraud and other property offences, the contracts with the investment company are often to be regarded as ineffective or null and void. Since the beginning of the 1990s, the BFH has been dominated by jurists who think in terms of civil law.

c) A constitutional connecting factor may also be a violation of the laws of reasoning and the principle of equal taxation. Here, “fictitious” profits are taxed that never really accrued and probably never had a real prospect of accruing.

d) According to the BFH, the tax liability is linked to the investor’s error: The investor was mistaken about the fact that his money was not invested for him on the capital market.

Who would like to turn as an investor against the dogma, “that also fictitious profits are to be taxed”, needs a long breath and a filled war chest: Because presumably here at the end the way will be necessary by all instances, up to before the constitutional court.

Anyone who invests his capital (from the outset) with the recognisable risk of a fictitious return can, for the time being, only be advised to structure this as far as possible in such a way that he can also deduct his losses later: A design worth examining would be the way out of the private direct investment, for example by interposing a company. As is well known, traders can at least write off their bad debts instead of having to pay tax on money they never received in the end.

by Johannes Fiala, lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), certified financial and investment advisor (A.F.A.), banker (www.fiala.de )

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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