*by Johannes Fiala, Lawyer (Munich), M.B.A. (Univ.Wales), M.M. (Univ.), Certified Financial and Investment Advisor (A.F.A.), EC Expert (C.I.F.E.), Banker (www.fiala.de)
The past: Tax saving schemes have been in fashion among Germans for decades. Tell a German that he can save 50 cents in taxes ? and he’ll give you a euro? ? sneers a mediator. He knows exactly what he is talking about, because many managing directors have already been introduced to tax-saving models such as FALK or COLUMBUS by him ? the money is not gone, only someone else has it. The tax advisor had to write off the investments. But that’s not all: In the past, it was possible to form so-called pension reserves with a pension commitment ? that meant tax-free money for the GmbH, but not necessarily also a reinsurance or asset values. These times are now past. The Federal Ministry of Finance (BMF) and the Federal Fiscal Court (BFH) put an end to this. The state needs money ? he has hired new auditors, because their work is highly profitable for the treasury.
The present:
In a recent letter, the Federal Ministry of Finance (BMF) comments on several recently published BFH rulings on the assumption of a hidden profit distribution in the event that pension benefits to controlling shareholder-managing directors cannot be financed. For the financial service provider, this is an argument to invite the entrepreneur to a delicate discussion with his tax advisor. The question here is whether a pension scheme can still be financed or whether a hefty back tax payment is imminent. Already the banker has announced himself to look after the right ? he too wants to get insight and reevaluate the loan collateral. In reality, the existence of the GmbH is at stake, because the banker has not yet priced in the potential additional tax payments in the credit rating.
Principles:
If a GmbH promises its shareholder-managing director a retirement and/or disability pension, the pension obligation cannot be financed if its recognition as a liability would lead to the GmbH becoming overindebted in the sense of insolvency law. More than 90% of all GmbH managing directors are completely out of their depth when it comes to the question of whether and how they have to determine current over-indebtedness in accordance with the Insolvency Code ? the valuation principles are unknown, insolvency dragging is the order of the day in the more than 19,000 GmbH insolvencies every year. The blame is then gladly pushed on the tax adviser ? who, however, seldom had a corresponding order, in case of doubt he is nevertheless concerned, since he can have a guarantor position. The BFH has now ruled that the balance sheet items which would have to be included in an over-indebtedness balance sheet are decisive for the examination of over-indebtedness under insolvency law. In principle, the pension obligation is to be recognised at the present value of the pension expectancy. This has been controversial until now. The administration is now applying the principles of judgment in all open cases. At the same time, the contrary administrative opinion according to text number 2 of the BMF letter of 14.5.1999 (BStBl 1999 I p. 512) is cancelled. At the same time, the BMF still grants a transitional regulation according to which the principles applicable before the publication of the BFH rulings can continue to be applied at the joint request of the company and the shareholders.
The future:
First of all, there is the question of over-indebtedness, because which financial service provider would like to conclude contracts if an insolvency administrator later nullifies everything by contesting them. The question then arises as to whether the tax advisor has had further training in insolvency law ? this is not a compulsory subject for practice. Then there is the question of financial feasibility: which financial service provider would like to develop concepts if the GmbH literally cannot afford them at all. A financing on credit, in German ? a leverage transaction, is occasionally implemented ? later the reversal follows.
Practice:
Entrepreneur S. is friends with a mediator ? who works for a structural distributor. Mediated a few years ago a meanwhile worthless closed participation ? as reinsurance for the pension commitment. The worthlessness leads to depreciation ? According to the above principles, the complete cancellation of the occupational pension tax savings model of the pension commitment is imminent. In some cases, the financial services provider identifies a gap in the reinsurance, delivers a sketchy management consultant’s expert opinion on his bAV sales connection, and is happy about the subsequent further closing and his commission.
The cruel consequences:
The tax auditor appears a few months later and determines a) hidden contribution through the ?private financing? of the reinsurance, b) Hidden profit distribution due to unfunded pension commitment. Now the result is discussed with the auditor of the tax authorities: The GGF does not file for insolvency, he does not recognise the over-indebtedness ? he takes note of the tax claim of the tax authorities. He violates the “obligation to provide for funds”, which he does not even know. Later comes the liability notice, and there it is. Several months after the audit, the tax assessment notice is issued ? Payment does not take place. The tax office seizes partly unsuccessfully, and files for insolvency for the GmbH. The insolvency administrator freezes the time value account and offsets the remaining reinsurance. The GGF is left without a pension and without a working time account. Both had been sold to him as “insolvency-proof”. It is a real pity that the occupational pension consultant had not recognised the opportunity for turnover through restructuring. As usual, the insolvency court forwards the insolvency administrator’s report to the public prosecutor’s office: the financial service provider and the tax advisor are blindsided ? they are supposed to be jointly responsible. But all of them only wanted the best for the client ? his money. It is regrettable that such cases are rarely insurable for the advisors. Pension advice without training and competence can be quite dangerous ? this surprising experience cost the two advisors dearly. Anyone who takes a naïve approach risks more than one set of hot ears. similarities with real-life occupational pension incompetence cases from practice are, of course, purely coincidental.
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About the author
Dr. Johannes FialaPhD, 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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