Life insurance coats from Liechtenstein: A distribution model with thick question marks
In order to avoid the final withholding tax on investment income, and in the end to reduce taxes and tax-free retention of income, life insurance undertakings from Liechtenstein offer so-called insurance shells. On the outside it says “life insurance” – on the inside there is a deposit of securities and a cash clearing account. Often de facto only tax evasion? Up to four institutions 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 through kick-back commissions. The bundle of costs can depress the return to such an extent that a normal fixed-term deposit would have been better in the end. The agent can sometimes set his own commission – after one year, for example, 10 percent of the assets may already be lost to the investor. With the four institutions involved, the question of creditworthiness arises, because criminal energy can be the cause of the customer losing all his assets with each of them. The “model contracts” offered usually require renegotiation to make them watertight – the “off-the-peg product” is easy to get across, but can in fact involve the highest risks.
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, intermediaries and banks are liable for subsequent taxation. The customer can take recourse against us because of wrong advice. Because legal tax avoidance would always have been possible. You don’t have to “crack” a bank to force the “Liechtenstein distribution model” to be legal. A life insurance policy is a taxable investment if the client agrees the investment decisions with the asset manager or his bank – this should be the rule in practice: If necessary, the “all-terrain” manager is based in Switzerland, 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 that could be considered as “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 must assume normal capital 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 advertise abroad with the “bankruptcy privilege” – because the involvement of a German or Austrian intermediary is harmful to this. It would probably be explosive to question what measures have been effectively taken to date 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. Financial advice requires the plausibility of distribution models to be checked. Current case law shows that sales managers and insurers can be liable for “intentional immoral damage”.
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 take the path of a voluntary disclosure: After the circumstances have been revealed, the path can be taken by the authorities in unclear constellations. Sometimes the investor will be able to get the escaped tax advantages of his bank or his mediator again – differently, if no damage developed at all, but only the desired positive expectations did not fulfill themselves. However, affected intermediaries and advisors could also go down the path of voluntary disclosure in order to obtain impunity – and as a prerequisite for this, without asking the client to pay the taxes from his or her securities account.
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’s office is still at the door. The customer will then find it difficult to hold the agent or adviser liable for a failed tax evasion.
by Dr. Johannes Fiala
published in Versicherungsvertrieb 02/2008, page 8
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About the author
PhD, 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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