– Avoiding the risks of the final withholding tax savings model –

The truth is often brutal, the lie only when it is uncovered.

Erhard Blanck.

In order to circumvent the final withholding tax on investment income, ultimately to reduce the taxes, and for tax-free retention of the income, life insurance companies from Liechtenstein, for example, offer so-called insurance shells. On the outside it says “life insurance” – inside there is a deposit of securities and a cash clearing account. Often de facto only tax evasion?

Up to fourfold fees – depending on provider

Up to four people can earn fees under such a model – insurance company, custodian bank, asset manager and investment company. Hardly any customer questions whether this cost multiplication after taxes is effectively profitable. At the same time, most clients do not even know how much the custodian bank or asset manager earns additionally via (basically forbidden) kick-backs. The bundle of costs can reduce the return to such an extent that a normal fixed-term deposit would have been better in the end. The intermediary – often credit institutions and financial advisors – can sometimes set his commission himself – after one year, 10% of the assets can already be lost for the investor.

Tax savings model with total loss risk

With the four groups of people involved, the question of creditworthiness arises, because criminal energy can be the cause of the customer losing all his assets. The “model contracts” offered usually require renegotiation to make them almost watertight – the “off-the-peg product” is easy to get across, but can in fact involve the highest risks.

Life insurance coats – in reality taxable investments?

The tax investigation has it actually quite easy: A private bank search, and already the investigator finds many millions to be paid tax on – a tax official can’t have it more comfortable. It is also possible to search all registered brokers – the tax authorities do not have to pay any money for this data either.

In return, the broker/banker is often still personally liable for the subsequent taxation. The customer will be able to take recourse against us for giving false advice. Because legal tax avoidance would always have been possible. You certainly do not have to “crack a bank” to force the “Liechtenstein distribution model” that is lived in many places to be legal.

Abuse of design by life insurance from Liechtenstein – § 42 AO

In order for life insurance to become a taxable investment, it is sufficient for the client to coordinate the investment decisions normally incumbent on the insurer with the asset manager or his bank – this should be the practical rule: If necessary, the “all-terrain” manager can be based in Switzerland, while the broker in Germany can then calmly rearrange the assets together with the client via the Internet. If the customer has de facto never given up the disposal of his assets, there is already no deposit with the insurer, which is considered analogous to a “premium payment”.

In numerous shell insurance contracts, the insurer does not assume the risk of death or other significant biometric risks. This is then a normal capital investment, but not a tax-privileged life insurance policy. Problematic: Even experts cannot say when a significant biometric risk is present and by when one has to assume a normal investment instead of life insurance.

Finally, the client receives his information on the development of his assets from the asset manager or his bank. The shell insurer bears neither the factual responsibility, nor does it keep a timely shadow accounting. In fact, the customer controls “his administrators” in a timely manner, but less so the insurer. If the insurer does not even implement the investment decisions, but is only informed afterwards about the composition of the capital based on the dispositions of the customer, it is suspected that the assets are not the assets of the insurer, but of the customer.

Questionable role of financial supervision

There is also a supervisory authority in Liechtenstein: Years ago, it already warned the insurers there not to go abroad with the “bankruptcy privilege” – because the involvement of a German or Austrian intermediary is harmful for this.

It would probably be explosive to question which measures have been effectively taken so far to prevent German investors from being harmed by (mostly unconscious) tax evasion. The lived practice of asset management by “wrapping the client’s portfolio” therefore sometimes appears to be a direct incitement to tax evasion.

More than 100 million tax arrears: Brokers and consultants misused as instigators?

Financial consulting requires the examination of the plausibility of distribution models – almost no training in the field of insurance cover deals with such liability relevant considerations. Current case law shows that sales managers and insurers can be liable for “intentional immoral damage”. If the tax authorities of the federal states were to carry out a consistent check here at the “request” of a federal ministry, could some shell insurers abroad become insolvent?

Ways out of evasion ?

Firstly, it is the duty of every honorary professional to obtain binding information from the tax authorities in case of doubt. This advice is also open to any banker or intermediary – something like this costs money and time and is therefore seen as a brake on sales. Consequently, only the public prosecutor’s office can practically point out “risks and side effects” to the persons concerned.

Affected investors can only take the path of a voluntary disclosure proactively: After the circumstances have been revealed, the path through the authorities can be taken in unclear constellations. Sometimes the investor will be able to get the escaped tax advantages of his bank or the mediator again differently, if no damage resulted at all, but only the desired positive expectations did not fulfill themselves. However, affected brokers and advisors could also go down the path of voluntary disclosure in order to obtain immunity from prosecution – and as a prerequisite for this, they could pay the taxes from their securities account without asking the client. Then it is too late for the investor, who was not fast enough – he then has a deposit reduced by taxes, but the public prosecutor is still at the door. The customer will then find it difficult to hold the intermediary or adviser liable for a failed tax evasion.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm