Tax fraud in practice/operating loss insurance

Insurers harm their customers – How self-employed, but especially freelancers, are led to tax evasion


In its ruling of 20 May 2009, the BFH (Case No. VIII R 6/07) confirmed its established case law according to which a practice breakdown insurance policy – also known as business breakdown insurance – for the event of illness or accident of the self-employed person is to be allocated to the private lifestyle. Anyone who deducts corresponding insurance premiums from their taxes exposes themselves to the suspicion of tax evasion. For years, numerous insurers have been providing guidance in this regard through their advertising brochures and the corresponding training of their agents.

This mainly affects doctors, notaries, non-medical practitioners, lawyers, engineers, tax consultants, architects, auditors, psychotherapists and other health care professions.


Tax: at most proportional premiums are exceptionally deductible

Only if operational risks, e.g. the closure of a medical practice due to the risk of epidemics or following fire, storm or burglary, are insured, can a proportional allocation to the operational area be considered. The cause of the risk must therefore originate from within the company, e.g. in the case of company-specific illness and accident risks. Otherwise, these are costs of private living, for which a deduction ban can be found in § 12 of the German Income Tax Act (EStG). Exceptionally, such premiums may possibly be partially taken into account for tax purposes as special expenses.


Insurance industry deceives even state dental association

Even a southern German state medical association is apparently fooled by the lying marketing of some insurers. It is announced unseen that the premiums of the practice loss insurance are tax deductible. The conclusion that the insurer’s benefits are taxable is then just as legally erroneous. Intentional immoral damage and suspicion of fraud Anyone who “recklessly and unscrupulously” advises another person to spend a lot of money on transactions with an uncertain outcome and thereby consciously accepts that the transaction will fail and that this person will suffer considerable economic damage as a result, is acting immorally (cf. BGH, NJW 1987, 1758).

In the present case, freelancers have taken out far too high insurance sums with insurers because they were told that in the event of a claim they would still have to pay taxes on the insurer’s benefits. Appropriate insurance sales training also exposes intermediaries and training managers to such liability under § 826 BGB. In addition, there is the accusation of fraud according to § 263 StGB (German Criminal Code), because corresponding insurers themselves or through their intermediaries deceived the customers about the fact that there was a qualification and authorization to give advice on tax issues: Finally, the insurance distribution ignored the decades of established case law of the tax courts. The purpose of generating higher premium income and commissions is obvious.


Other typical advisory errors made by intermediaries

An alternative to practice loss insurance would be per diem sick pay. Only there is no ordinary right of termination after three years, and there is no right of termination in the event of a claim for the insurer. In the case of practice breakdown insurance, on the other hand, the insurer can terminate the policy in the event of a claim – if serious health problems are then present, the customer is nowhere to be insured. Thus, in the event of a claim, the customer is obviously led by the insurance sales force into a life situation with a “place under the bridge” with some deliberate intent.


Alternative to practice closure

However, the limit for insurability in the daily sickness allowance insurance is the net income, whereas in the practice breakdown insurance, the practice costs that continue to be incurred in the event of illness can also be covered above and beyond this. However, for many freelancers, closing their practice in case of illness is not a real option at all, because patients or clients will then also be lost. Rather, the continuation of the practice with a representative is the better choice – then the practice costs are self-supporting through the representative’s activity, and the insurance of the lost net income in a daily sickness allowance insurance is completely sufficient. In addition, many health insurers are generous in their definition of insurable net income. The practice loss insurance should then only be “added on top”, but may also be dispensable.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of (published in CoMed issue 09/2009, page 72)

and (published in Small Animal Medicine, issue 12/2009, page 353)


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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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