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Investing money abroad could tempt people to break the law


MUNICH – Whoever moves his money abroad, for example into an Austrian private foundation or a Liechtenstein family foundation, can by no means be sure that the world income principle does not force him to declare it in Germany.

Foreign investment opportunities could downright lead to legal error. This had to experience recently also a former executive committee of the Bavaria LB, which came therefore into pre-trial detention. From tax evasion of 100,000 euros, imprisonment is the rule.

And from an evasion of millions, a suspension of probation is no longer an option (BGH judgement of 02.12.2008, file no. 1 StR 416/08).

Munich criminal defense attorney Gerhard Bink:

“Alongside this, in many cases there is a threat of prosecution for money laundering. The problem is that for some years now, evasion no longer relates only to the last ten years, which means that larger amounts of evasion are more often reached.

The Higher Regional Court (OLG) of 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.


Incompatibility of foreign camouflage constructs

The fact that other countries and foreign 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 worth nothing 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.

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 is also subject to tax. Quite typical for misadvice by foreign tax experts, mediated by German bank advisors, is the statement:

“If you don’t stay in Germany for more than 183 days, you don’t have to pay taxes for your cover there.”

Of course, the federally certified tax expert had no training in German tax law and therefore could not recognize that even in the case of a vacation home in Germany, the world income must be declared.


Inheritance trap through foundation or trust off the shelf

The bitter consequence of the aforementioned rulings is that the entire assets of the foundation become part of the decedent’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, predominantly bank advisors – from Germany and abroad – praise such dubious solutions to this day as “royal roads for succession planning”, without having an overview of the legal consequences in all the legal circles concerned.

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 your foreign banker or foundation administrator because of a “suddenly recognised” tax offence and risking a penalty in Germany.


by Dr. Johannes Fiala


by courtesy of (published in Spectator Dentistry 02/2011)

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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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