Money abroad: When world income and world assets are taxable here

Do foreign financial advisors systematically induce tax evasion?


Assets abroad – tax liability in Germany

If you move your money abroad, for example to an Austrian private foundation or a Liechtenstein family foundation, you can by no means be sure that the world income principle will not force you to declare it in Austria. This was also recently experienced by an ex-board member of Bayern-LB, who was remanded in custody for this reason.


No suspended sentence

From tax evasion of 100,000 euros, imprisonment is the rule. And from 1 million evasion is regularly no longer a suspension to probation in question (BGH judgment of 02.12.2008, Az. 1 StR 416/08). The Munich criminal defense lawyer Gerhard Bink: “In addition, there is often a threat of prosecution for money laundering. It is problematic that for some years the evasion no longer refers to only the last 10 years, which means that larger amounts of evasion are more often reached.


Foreign camouflage constructs are considered ineffective

The OLG Düsseldorf recently ruled (judgement of 30.04.2010, ref. I-22 U 126/06) that the intention to evade taxes leads to the non-recognition of a foreign foundation. Already the OLG Stuttgart (judgement of 29.06.2009, file no. 5 U 40/09) assumed that the possibility to issue instructions to the foundation administrator leads to the fact that the establishment of a foreign foundation constitutes a sham transaction and is therefore considered invalid under German inheritance law, for example.


Private International Law: Incompatibility of foreign camouflage constructs

The fact that foreign states and courts recognise “constructs for tax optimisation” there does not mean that this view is also shared by German tax authorities and courts. The trap for founders and other German clients is therefore that foreign advisors prepare fine legal opinions, for example on local company and tax law, which are not worth a shot of powder in Germany. Tax havens, such as Switzerland and Liechtenstein, live from the fact that they lead their clientele straight to legal error by making the consultation of German tax and legal advisors appear superfluous. It is a serious mistake to have part of one’s income paid into an Austrian private foundation but not to declare it in Germany and therefore not to pay tax on it. Even the expert opinion of a law firm abroad, no matter how renowned, does not protect against imprisonment in Germany.


Liquidity trap due to foundation design from abroad

Time and again, foundations are set up in such a way that there are no distributions to the founder and the beneficiaries. Nevertheless, Section 15 of the Foreign Tax Act stipulates that income not distributed by persons with unlimited tax liability in Germany must also be taxed. Quite typical for misadvice by foreign tax experts, mediated by German bank advisors, is the statement “if you do not stay longer than 183 days in Germany, you do not have to pay taxes for your camouflage construct there”. The federally certified tax expert of course had no training in German tax law, and therefore could not see that even with a vacation home in Germany, the world income must be declared.


Inheritance trap foundation or trust off the peg

The bitter consequence of the above-mentioned rulings of the Higher Regional Courts is that the entire assets of the foundation become part of the deceased’s estate. The costs for the foreign advisors and foundation administrators could then also have been saved – the beneficiaries there will not see a cent in case of doubt. Nevertheless, it is predominantly bank advisors – from Germany and abroad – who to this day praise such dubious solutions as the “royal road to succession planning”, without having an overview of the legal consequences in all the legal circles concerned.


Professional clean bill of health for capital investments in tax havens

Anyone wishing to transfer assets to foreign foundations or companies has no choice but to take out safeguards in both countries concerned. Only a written assessment by at least two independent advisors can provide effective protection against criminal charges. Not infrequently such Persilscheine are so inaccurately formulated that tax authorities and public prosecutors are not impressed by them later. In Germany, it is possible to obtain binding written information from the tax authorities for a specific intended arrangement. This is usually cheaper than being blackmailed afterwards by one’s foreign bank(st)er or foundation administrator because of a “suddenly recognised” tax offence and risking a penalty in Germany.


by Dr. Johannes Fiala


courtesy of

from (published in Computern im Handwerk, issue 1-2/2011, page 5)

and (published in Vermögen & Steuer, issue 02/2011, page 24, under the heading: Taxable world income from assets abroad)

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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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