The authors deal with the issue of criminal tax fraud and money laundering using foundation trustees and life insurance companies in Liechtenstein. From the practice of investigative investigation, they define whether, among other things, instigation or aiding and abetting by bankers or intermediaries is to be assumed. Red.
Of course, in recent years the question has repeatedly arisen as to why taxes should be paid on investment income of around four percent per annum. After all, a “perceived inflation” of around five to nine percent per annum is associated with a far greater loss of purchasing power. This is unacceptable.
This attitude meets with little approval from the tax investigation authorities. In suspicious cases, the practice of investigative investigation focuses on the question: voluntary disclosure or tax assessment? For years tax investigation offices have been writing to German citizens for “preliminary proceedings according to section 208 paragraph. 1 No. 3 in conjunction with §§ 85, 88, 90 of the German Fiscal Code (Abgabenordnung, AO) on their capital investments and investment income as of 19XX”.
First a polite letter from the tax office
The polite letter from the tax office then begins with the words “Within the framework of the investigations at the X-Bank (Germany), with which you are certainly familiar from media reports, documents are available here according to which you had an account/deposit at the Y-Bank (abroad) and held securities there. In the income tax returns submitted by you it is not apparent that investment income from this account/deposit has been declared”.
It is hardly surprising that the friendly letter also contains a request: “Please explain and prove the origin of the money.”
A popular trick in the 1980s was to pay “tax-neutral money” into a life insurance policy. After twelve years, the evasion was often statute-barred – and the proceeds were legally tax-free – the money was, so to speak, “washed” by the passage of time.
No wonder that larger and smaller insurance companies have been and continue to be targeted by investigators.
Locations of the contaminated material are in Germany
The vast majority of the assets in Liechtenstein foundations and life insurance companies are not located abroad: this also corresponds to the sales motto of German private bankers that “the client’s money should remain in the bank”.
For the tax investigation, a glance into the account is often enough to see where the assets came from and thus to determine the presumed beneficial owner.
Money laundering is a criminal offence
Money laundering is the smuggling of illegally earned money (for example through tax evasion) into the legal financial and economic cycle, which is punishable under Section 261 of the Swiss Penal Code.
The payment of black money into a life insurance policy thus additionally fulfils the criminal offence of money laundering, which is precisely aimed at concealing its origin. Exactly what AlCapone had already tried to do when he invested the proceeds from tax evasion in the smuggling of alcohol in laundrettes – and in the end was only allowed to take a perennial “holiday” on Alcatraz at state expense because of tax evasion and money laundering. Insurance companies and other financial service providers are obliged to identify their customers, monitor accounts and transactions for suspected money laundering and report suspicious activity to their customers – but are not allowed to inform the customer of the report.
Money laundering becomes statute-barred only after tax evasion
In the case of money laundering, the period of limitation pursuant to section 78, paragraph. 3 No. 4 StGB five years. According to section 78 a p. 1 StGB, the statute of limitations begins as soon as the offence has ended. If a success belonging to the facts of the case occurs later, the statute of limitations according to section 78 a p. 2 StGB begins at this point in time.
So if the amount paid out under the life insurance policy reappears twelve years later after the statute of limitations for tax evasion, the statute of limitations for money laundering does not begin until the end of that period. The consequence is not only punishment – imprisonment for up to five years – but possibly even the collection of the money, not simply a subsequent tax payment.
Foreign foundations cost tax
The Federal Court of Finance (BFH) has decided in its judgement of 28 June 2007 (Ref.: II R 21/05): “The transfer of assets to a Liechtenstein foundation is not subject to gift tax if the foundation cannot dispose of the assets freely in fact and in law in relation to the founder according to the agreements and regulations made.
However, anyone who saves the inheritance or gift tax on the endowment of the foundation in this way remains the beneficial owner and has to pay personal tax on investment income on an ongoing basis. The investigator will certainly be able to discover the foundation account at the German credit institution.
Liechtenstein LV in sight
German asset managers, insurance brokers and bankers have been startled not only since the “Adangulum case”. Prof. Gierhake, an expert in life insurance wrapping of assets (insurance wrapping) for tax savings, has been warning for years about the risks of abuse of design (paragraph 42 AO). There are four indications that speak for a full tax liability of some Liechtenstein life insurance companies:
1.) The policyholder/bank client continues to speak and communicate in writing exclusively with his bank advisor about investment decisions.
2.) The contract does not involve any significant biometric risk within the meaning of German tax law.
3.) The reporting on the development of assets in the LV portfolio is carried out by the bank.
4.) The insurance company does not play a significant role in the implementation of the contract, the contract is “lived” in the (mostly German) bank, a real insurance specialist is “not seen” by the customer.
Further evidence may be added:
5.) The customer selects – instead of the insurer – the custodian bank for the investment funds.
6.) The client/policyholder does not pay money to the insurance company, but transfers his personal deposit to the insurance company.
7.) Dubious advertising or advertising prohibited by the supervisory authority with a “bankruptcy privilege” under Liechtenstein law, which is generally not effective if a German “intermediary” is involved because of mostly mandatory German law.
8.) The deposit in the insurance shell is managed by the Bank in accordance with the direct strategic guidelines and on behalf of the Customer.
Aiding and abetting – Responsible persons in the country are liable
Probably the vast majority of “intermediaries, advisors and consultants” of German customers of life insurance coats affected in this way start to sweat when they realize their personal tax liability: The full proof for the tax-damaging evidence is always in the own customer file – to document own investment advice or asset management in agreement with the capital investor.
If the financial institution detects tax evasion and thus also money laundering, it must, according to the law, report this to the customer – management boards that fail to do so otherwise risk being dismissed by the supervisory authority. Of course, it is then too late for the customer to make a voluntary disclosure – which, by the way, can be a punishable offence not only in cases of tax evasion but also in cases of money laundering.
The investigator also finds the access data for Internet banking at some intermediaries or customers in order to design the securities portfolio directly with an asset manager – without the influence and prior knowledge of the insurer. An effective control of the asset manager sometimes does not take place at the insurer’s premises due to a lack of effective “shadow accounting” to ensure compliance with investment guidelines. Herein lies a total loss risk for the customer which must be clarified.
Suspicion factor “low risk protection
Even though there is no longer a minimum level of protection against death for tax purposes, this does not mean that it can be as small as you like. Only the mathematician, but not the tax official, would come up with the idea that something for which there is no lower limit can also be zero. This was also clarified by the BMF letter of 22 December 2005 (note: IV C 1 – S 2 252 – 343/05): “An insurance policy in the sense of Section 20 Para. 1 No. 6 EStG differs from an investment without insurance character in that it covers an economic risk arising from the uncertainty and unpredictability of human life for the human life plan (biometric risk). The risks typically covered by life insurance are death (risk of death) or uncertain life expectancy (risk of survival, longevity risk)”.
Plausibility check safest way for consultants
The author of the BMF letter adds: “There is no insurance contract within the meaning of Section 20 (1) No. 6 EStG if the contract does not contain any significant risk bearing. Although, according to case law, brokers are obliged to check the fiscal, legal and economic plausibility of the products offered, it is known from the media that even renowned credit institutions still fail to do so and mediate dubious tax saving models. For example, the so-called “Optima model”, which was finally prohibited by the supervisory authority, had already caused a stir with several deaths of insurance company directors and a discussion in the German Bundestag. The damage is then firstly suffered by the investor, who can later take recourse to his bank, consultant or agent.
Risk of the “undefined legal concept” Consultant liability
The Federal Court of Justice (BGH) also clarified in its ruling of 20 October 2005 (Ref.: IX ZR 127/04): “If the interpretation of the undefined legal concept of a tax standard […] is open and significant for the decision to be made by the taxpayer, the responsible adviser must in principle point out the risk associated with the uncertain assessment of the legal situation”. For the sale of Liechtenstein life insurance policies, it is certainly a hindrance that the advisor must therefore advise the client to obtain binding information from the tax office (BGH ruling of 15 November 2007, Ref.: IX ZR 34/04). Particularly since the provision of Section 42 AO (abuse of structure) has recently been tightened and an obligation to pay fees for binding information was introduced almost simultaneously.
Tax fraud prevention or tax system redesign?
The Federal Minister of Finance (BMF) writes in the BMF Journal of 5 March 2007 “Calls for a reorganisation of our tax system, as they are currently being heard in various quarters, miss the heart of the problem. Professor Kirchhof apparently considers the German tax system (about 300 tax laws, over 70,000 ordinances, about 60 to 70 percent of the world’s tax literature) to be so complex and uncontrollable that the limit of unconstitutionality has been reached. The minister is right: obedience to valid tax regulations by citizens is one thing – the other is the overdue system reform. V&S
Box: Taxable investment portfolio or tax-privileged fund life insurance?
A unit-linked endowment insurance policy consists of a deposit for investment funds and a term insurance policy. In its judgement of 17 October 2007 (Ref.: II R 53/05), the Federal Court of Finance then also stated: “It is characteristic of an insurance policy that a risk affecting the individual to suffer loss or damage due to the occurrence of an uncertain event is distributed over a larger circle of persons. The Retirement Income Act introduced the principle of full tax liability for capital-forming life insurance policies from 1 January 2005.
In order to maintain the privilege of half of the downstream taxation, it is no longer necessary to pay a regular premium for at least five years, nor is a legally defined “minimum death cover” required. However, it must be a life insurance policy within the meaning of the Insurance Supervision Act, as can be seen from the letter from the Federal Ministry of Finance dated 25 November 2004 (ref: IV C 1 – S 2 252 – 405/04).
New audit manual takes into account the different stages of the audit
Who a tax audit (BP) can meet, when and why, how consultant and client should prepare themselves and what should be done in
worst case scenario is explained in detail in the new BP Handbook, which is scheduled for publication in May 2008.
The authors describe all phases of the process, first of all those before a BP such as typical occasions and first signals that
Sources of information of the tax authority, their material and local jurisdiction, admissibility, the audit order,
Corrections before the start of the exam and exam preparation by the consultant.
The second phase takes up processes during BP, starting with the principles and methods, the
accounting audit, the estimate, the duties to cooperate and inform, the possible transition to
Tax investigation, the actual notification, up to the final meeting and the audit report.
In a third step, consequences are shown, such as the change of tax assessments, the temporary
Legal protection, the possibility of legal action, binding commitments up to and including criminal proceedings.
Dr. Norbert Vogelsang and Rudolf Stahl, BP Handbook, Before the audit In the audit After the
Tax audit 2008, around 500 pages, hardback, approx. 68 Euro, ISBN 978-3-406-54318-0, available from the banking industry
Service GmbH, Frankfurt am Main, fax 0 69/7 07 84 00, telephone 0 69/97 08 33-21 (Brigitte Wöllner)
By Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm
Published in Vermögen und Steuern, 04/2008, page 38 ff.
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About the author
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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