Insurance coats come into fashion

With the final withholding tax, traditional asset management with funds is losing much of its appeal. Insurance shells based on the Luxembourg or Liechtenstein model are likely to gain in importance despite the current heated debates on tax evasion.
You don’t have to be a prophet to predict one thing: insurance shell companies will come into fashion in autumn 2008 at the latest thanks to the final withholding tax. This is already the case with fund investments. Anyone who wraps an off-the-shelf insurance wrapper around their investment funds pays a maximum of 24 percent tax, even at the top tax rate including solidarity surcharge and church tax. The final withholding tax, on the other hand, leads to a rate of around 28 percent of income.
High costs are often woven into the insurance mantle
“Pension fund policies are likely to develop particularly positively,” estimates Thomas Keck, head of special sales at Allianz Lebensversicherungs- AG. With these products, the customer has a clear advantage over other forms of old-age provision. Keck does the math: If an average earner at the age of 40 with a marginal tax rate of 30 percent pays 10,000 euros into a unit-linked pension insurance policy or into an accumulating equity fund with a performance of six percent from 2009, he will receive around 2,800 euros more after tax in the case of the pension policy after 25 years. It also achieves an advantage in the case of ongoing premium payments. The problem with the insurance solution, however, is often its non-transparent design. Thus, high costs are often woven into the insurance mantle.
Not only off-the-peg goods, but also tailor-made products
In addition to mass-market insurance, exclusive insurance shell companies are now causing a sensation, mainly from Liechtenstein, but also from Luxembourg. However, these coats are tailored differently than the classic fund policies. With them, an asset manager or even the policyholder himself can act like a fund manager on an insurance platform. The coat only serves as a “disguise” for the bank deposit underneath. Gains realized on interim sales remain tax-free because the entire securities portfolio is transferred to a life insurance policy. During the term of the insurance no taxes are due at all, and after maturity only half of the income from the securities investment has to be shared with the tax authorities. However, tax offices in this country are already keen on anything related to foreign insurance. The background to this is that Liechtenstein and Luxembourg are the only German-speaking countries to have standardised insurance secrecy, which corresponds to strict banking secrecy. Through the insurer, “no notifications of deposits and withdrawals are made to German authorities and other unauthorized third parties” in Liechtenstein, Gerd Schade of the company “kommunales, betriebliches und privates Pensionsmanagement” in Kella told “Versicherungstip”. Despite the debate on tax evasion through Liechtenstein fiduciary accounts, it is considered a criminal offence in Liechtenstein to disclose personal banking and insurance information to third parties, except in connection with criminal activities. Nevertheless, policyholders should avoid design abuse in order to avoid possible subsequent taxation, which can be levied retroactively for up to ten years.
The bankruptcy privilege does not exist in all circumstances
The choice of Liechtenstein as a financial centre for shell insurance is not automatically advantageous, although it is often even advertised that the policy can be taken out in Germany. “The choice of Liechtenstein law is inadmissible in particular in such cases in which it is made by German nationals with habitual residence in Germany and the insurance contract is concluded with the assistance of an intermediary,” warns lawyer Dr. Johannes Fiala from Munich. In concrete terms, this means “that the contract brokered via a German credit institution in Germany does not enjoy bankruptcy privilege,” according to the tax and investment expert. In this case, German law applies with only very limited protection against seizure of pure old-age provision. So most of the money would be gone if the customer went bankrupt. This also applies if a German intermediary crosses the border together with the customer. The way out: the investor must aggressively approach the Liechtenstein insurer, who then offers “correspondent insurance” under Liechtenstein law, which is nothing more than free investments, thus circumventing the stricter rules of German insurance supervision, insurance mediation and insolvency law. “This is perfectly legal, as long as the German investor pays tax on his profit from the shell insurance in Germany when it is paid out later,” Fiala affirms.
Shares, bonds, funds and derivatives are eligible as cover funds
The foreign life insurance policy appears interesting not only because of the largely free product design, but also with a view to inheritance. If the investor dies, no income tax is payable. Provided, according to the Frankfurt office of the law firm Fried Frank Harris Shriver & Jacobson, the following condition is met: The asset manager continues to maintain the insurance custody account for the remainder of the term, but for at least 12 years. “Often, however, only wealthy clients come to Liechtenstein,” Andreas Bürse-Hanning, CEO of Aures Finanz AG & Cie. KG in Mülheim, Germany. At Swiss Life (Liechtenstein), for example, investors could contribute an existing custody account with a value of EUR 100,000 or more as a one-off investment. All stocks, derivatives, and mutual funds are eligible as “cover stock eligible” deposits for this particular life insurance policy. Bürse-Hanning lists the advantages of this shell insurance: – The portfolio remains flexible because the asset manager can switch between the securities positions at will. – The policyholder may dispose of all or part of his assets at any time by way of a payout from the shell insurance. – There is no charge for early termination. – Asset management remains with the bank of the investor’s choice, which can be located anywhere in the world. – The assets grow tax-free within the mantle. – The wrapper avoids the losses normally incurred on compound interest as a result of the final withholding tax and defers tax on the income.
Liechtenstein LV policies are seizure-proof
The German tax office only intervenes when the accumulated assets are paid out. But then the same bonus applies as for German life insurance policies. After a minimum term of twelve years and a payout on reaching the age of 60, the customer pays tax on half of his profit at his personal tax rate. This means that even at the top tax rate, you remain below the level of the final withholding tax. If an annuity payment is agreed, only the significantly lower share of the income is taxable. A particular advantage of the shell policy in Liechtenstein is the bankruptcy privilege that applies there, which does not exist in this form in Luxembourg. The life insurance policy is thus protected against seizure and does not fall into the bankruptcy estate of the policyholder. “In this way, securities saving also becomes part of private old-age provision for tax purposes,” Bürse-Hanning explains.
Numerous providers cavort in the principality
The registration of beneficiaries in the event of death is effected via the subscription right and can thus be agreed independently of the estate. However, lawyer Fiala warns against euphoria here too: “There are certain periods of shame to be observed in the German Insolvency Code, in the Anfechtungsgesetz and also in the Liechtenstein Bankruptcy Code.” This means that when insolvency approaches, it is too late to take out a shell insurance policy in Liechtenstein, as this would undermine the protection of creditors. Lawyer Fiala considers a five-year period of shame to be indispensable. Numerous providers of such coat insurance are already active in the Principality. For example, the online financial broker Laubach & Cie. advertises. at www.laubachcie. de. However, the product information is mostly very vague. For example, if you are looking for detailed information on costs, you will usually find it lacking. It should be clear to any investor who does not open a custody account directly in Liechtenstein that it will be more expensive than a traditional life insurance policy, which often calculates with four percent of the premiums alone as acquisition commission for the sales department. After all, there are several service providers involved here who also have to be remunerated.
Higher costs must be justified by the capital investment
In addition, according to experts, 0.5 percent of the investment sum is charged for setting up the contract, sometimes from a minimum of EUR 2,000, a further 0.5 to 1.0 percent for ongoing management and an additional 0.75 to 1.0 percent for the asset manager. This increases the pressure on the investment to succeed in order to justify these costs. However, the information in the product descriptions is also thin on the ground as to which assets the shell insurers and their asset managers want to use to achieve higher returns without offering a guaranteed interest rate at all. “I wouldn’t refer a client to insurers, banks or asset managers unless they all had top-notch credit ratings,” sums up attorney Fiala.
Detlef Pohl
(portfolio international SPECIAL EDITION No. 1 March 2008, 16)

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Dr. Johannes Fiala Dr. Johannes Fiala

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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