Life insurance companies and foundations from Liechtenstein, Bermuda, Switzerland and Papua New Guinea

– When structures for asset protection and succession planning are ineffective –

Banks and insurance companies, as well as financial advisors from Germany and abroad, are praising foreign camouflage constructions via prospectuses and appraisals. This should make it practically possible for assets of 100,000 euros or more to constitute a secure succession arrangement by circumventing domestic inheritance law. More often, they promise asset protection that doesn’t take effect – or hope for a tax exemption that didn’t exist in the first place.


embezzlement trap

Insiders call foundations, trusts and so-called institutions the biggest heist in history. Not only since the reports about “Offshore-Leaks” it is known that beneficiaries are often informed about their claims to money and works of art even after years, or never at all by the responsible trustees. It happens time and again that assets cannot be recovered during one’s lifetime because the responsible trustee or the management of the foundation abroad handles things differently in breach of contract. Even if one has reserved the right in a side letter to replace a trustee or asset manager at any time, in many cases there is initially no way around the normative force of the factual.


Enforcement and court costs trap

In the case of tax havens, there is often the problem that either it is not possible to sue in Germany or, in the absence of an intergovernmental enforcement agreement, it is not possible to enforce abroad, but rather new proceedings must be brought locally. This is often associated with the disadvantage that the plaintiff must first present the foreseeable costs of both parties in addition to the court costs. However, trustees and directors can certainly be personally enforced if they are only employed in the tax haven for their own targeted legal tax avoidance and reside somewhere in the EU or the USA, for example. Investors are often unaware of a conceivable contractual arrangement based on international agreements on arbitration courts, although this would often mean that the lack of an enforcement agreement for court decisions would no longer be an issue.


Postal warehouse and asset manager trap

This applies not only to foreign legal entities such as foundations, but also to the case where the asset manager of a life insurance shell – not controlled by the insurance company – violates the agreed investment guidelines and speculates, or even withdraws the assets in a roundabout way. Similarly, even in the case of a normal unit trust policy, the fund management may violate the investment guidelines stated in the prospectus and the value of the fund may be largely wiped out without the life insurance investor being able to enforce any claims for damages directly against the fund management or claims for information against the insurer.

After all, since the life insurer acquires the fund units in its own name, the policyholder himself has no legal relationship at all with the fund provider. The deliberate violation of the investment guidelines is only noticed by customers years later, when they have their statements, account statements and other mail stored at the financial institution as a precautionary measure, so that those responsible may have constantly shifted the assets just to scam fees. If the customer then discovers this, his attention is drawn to the small print, according to which objections should have been raised within a period of about one month.


Revocation and tax evasion trap

If the founder reserves the right to revoke the establishment of the foundation, as is customary in the so-called ancillary articles, the establishment of the foundation will not be recognised in German courts (OLG Stuttgart judgment of 29.06.2009, ref. 5 U 40/09). The assets of the foundation then do not accrue to the beneficiary but to the estate. The heirs may sue the beneficiary in the country for delivery. In Liechtenstein, too, it has been recognised by the courts that, in the event of a deliberate circumvention of mandatory provisions of inheritance law, the establishment of a foundation is null and void as a sham transaction. This may also be the case if the founder reserves the right to continue to use the assets of the foundation without restriction for his own purposes.


The nullity of the establishment of a foundation is also assumed if one of its main purposes is to evade taxes, since this is disapproved of in Germany as immoral: “Accordingly, the decisive factor for the breach of public policy is whether, in the individual case, the result of the application of foreign law is in such serious contradiction with the fundamental ideas of the German regulation and the concepts of justice inherent in them that it must be regarded as intolerable …” (OLG Düsseldorf, judgment of 30.04.2010, ref. I-22 U 126/06).


In this context, every founder or purchaser of a life insurance policy abroad would be in a position to have the arrangement implemented in such a way that, for example, final withholding tax or EU withholding tax is always withheld and paid. If there is then no church tax liability, there can foreseeably be no evasion.


Administrative seat and bank trap

Certain domestic financial service providers offer their clients the service of brokering cover constructs from abroad. This means that the assets remain in Germany, although in many cases they end up in a foreign trust or foundation, a foreign limited liability company or public limited company. If the asset management is carried out by the client and/or the bank in Germany, there is much to suggest that the managers, who are only interposed or intervened for appearance’s sake but are inactive, do not in fact manage anything. Then the legal administrative seat is in Germany.


For example, Switzerland – but not Germany – has joined the “Hager Trust Agreement”. As far as there are no bilateral agreements and also no recognition of foreign companies (with the option to be registered in the commercial register) follows from EU law, the “numerus clausus” of the company forms remains.


According to case law, the foreign companies and trusts are then corporations “not (yet) registered in Germany”, i.e. pre-(founding) companies, so that these foreign companies (from the time of transfer of the administrative headquarters to Germany) are to be treated as sole proprietorships, BGB companies or OHGs. The legal background in international private law is in particular the question of whether the foundation theory (e.g. CH, USA) or the (administrative) seat theory is recognised in a country (cf. BGH, judgement of 01.07.2002, ref. II ZR 380/00, OLG Hamburg judgement of 30.03.2007, ref. 11 U 231/04).

The legal consequence is that all shareholders are personally, unlimitedly and jointly liable, so that there can be no question of asset protection. This also applies if bearer shares, which are widely used for concealment purposes, exist for this construct.


Bailout and tax haven trap

If an insurance policy is stored abroad, e.g. with the insurer or a trustee, it is nevertheless possible that the policyholder can be compelled to surrender the policy in Germany, in particular if the life insurance policy is not already in the hands of the beneficiary in the event of execution or insolvency. Whether a beneficiary or, for example, the insurance company may keep the policy will often not be determined solely by foreign law.


In many cases, the insolvency administrator does not even have to conduct additional insolvency proceedings abroad. Within the EU, the principle of universality applies, i.e. the sole jurisdiction of the insolvency administrator at the debtor’s place of residence. If the assets are located outside the EU, e.g. in Switzerland, § 97 of the Insolvency Code (InsO) obliges the insolvency debtor to provide the insolvency administrator with the necessary authorisations and powers of attorney, in particular for the seizure of assets abroad. This follows from the statutory active duty of the insolvency debtor to surrender the assets, as well as his duties to provide information and to cooperate.


Mere references to tax havens already justify insolvency administrators to demand a foreign power of attorney, even without concrete indications of assets in certain states, in particular insofar as domestic insolvency proceedings abroad are not directly recognised in accordance with the principle of universality (BGH decisions of 18.09.2003, ref. IX ZB 74/03 and 75/03). In practice, this means that banking secrecy or insurance secrecy, which may be in force abroad, will in fact be empty – even without automatic data transmission to the domestic market for taxation purposes.


In addition, the bankrupt is already obliged in the opening proceedings to release notaries, lawyers and tax consultants, for example, from professional secrecy. For enforcement purposes, coercive means such as arrest or coercive detention may be used. In addition, the insolvency trustee or insolvency assessor will think of a postal block, § 99 InsO. The often too late “repair” of half-finished designs will thus be made more difficult or will have to fail. Because the customer is not informed about the complex administrative requirements for the practical case of emergency for the effectiveness of the hoped-for asset protection. About the so-called bankruptcy privilege abroad only the alleged effortlessness is conveyed as an impression, also so that the customer does not feel unsettled or worried when selling.


Advice and data protection trap

Only the brokerage of new insurance shell companies – for example from Liechtenstein in Germany – is regulated, combined with a reporting obligation of intermediaries or insurers to the German tax authorities on concluded contracts. The foreign insurer needs a licence in the EU and, if based outside Germany, the necessary registration with BaFin. If the insurer is based outside the EU (e.g. in Switzerland), it would be prohibited to broker unauthorised insurance. Here, it is only possible to take out correspondence insurance by bypassing an intermediary, which also makes it possible to obtain insurance cover that is in part significantly cheaper or up to more than 20 % higher benefits, e.g. in annuity insurance for men, due to the unisex tariffs that are not prescribed in Switzerland.


However, the sale of used insurance policies has not yet been regulated. If these are purchased new from the insurer by a trusted fiduciary – without data leaks in the office – for, say, a dollar initial premium payment abroad, they can later be resold to an end customer (without any regulated intermediary licensing and legal information requirements) without the need for insurance secrecy. It can also remain with the previous policyholder, who only assigns all rights. In order to avoid premature expiry, annuity policies with a high annuity starting age are often taken on a last-death basis for up to seven newborns, whereby no biometric risk is included at all until the start of the annuity. Subsequent deposits could then be used by the trustee or purchaser to invest in almost any asset. Misappropriation could, for example, be prevented by standard bank loan collateral or compensated by fidelity insurance. In the absence of automatic reporting of these policies to the German tax authorities, the investor must of course take care of the tax reporting himself at the latest on expiry.


This is in complete contrast to the successful sales approach of wrapping closed investments with entrepreneurial total loss risk in insurance shells only because this suggests security, the associated investment risk no longer requires so much explanation, and this complexity then multiplies commissions, fees and management costs. By wrapping with a life insurance the license as an insurance intermediary is sufficient here after all also and it can in such a way wrapped financial products without the license necessary for it and without the specific information and clearing-up obligations valid for the plants concerned, which minimizes also the adhesion.


Many initiators make a living out of making products or constructs a little complicated and claiming it has to be that way so that no one gets the idea that it can be much simpler. Just like when someone in Papua New Guinea wants to get rid of his neighbor, and calls in famous magicians to do so, to whom he then has to give a few thousand dollars and a few cassowaries, along with hosting a sacrificial feast with 20 pigs, only to learn after the ceremony that the neighbor is now bewitched and doomed, and that he should now just go by there for safety’s sake to smash his skull in with a stone axe. Of course, it would be far too dangerous to attempt this without such a preceding ceremony.


by Dr. Johannes Fiala


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About the author

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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