Tax liability for the snowball system and for fictitious returns

Total losses fall under non-taxable assets and are not deductible. Snowball systems have been the order of the day in Germany for decades. Typically, high-yielding, even supposedly bank-guaranteed, investments are offered. Or the investor is sold shares, gold, diamonds or commodities that do not exist. The providers of such investment models often falsify asset certificates or reference letters from auditors and banks in order to deceive intermediaries, advisors and customers.

 

Loss of assets due to fraud already at the time of deposit

The Federal Court of Justice (BGH, judgement of 18.02.2009, file no. 1 StR 731/08) considers this to be a punishable fraud to the detriment of the capital investors. The decisive factor is the economically assessable risk of loss to which the investor is exposed at the time the investment sum is paid in. The usual commissions are up to more than 15% of the investment sum, which is regularly concealed from the investors. Not infrequently the mediators, Tippgeber and advisors of such investments expect because of assistance a penalty just as the initiator. If there is a conviction, any licences must be withdrawn on a regular basis. An escape into insolvency will mostly fail, because no residual debt discharge will be granted as far as debts from intentionally committed tortious acts are concerned (§§ 302 No.1, 174 II InsO).

 

Fictitious profits taxable – subsequent losses not tax deductible

A new ruling by the Federal Fiscal Court (BFH, ruling of 02.04.2014, Ref. VIII R 38/13) clarifies in all clarity when tax evasion exists despite income that never actually flowed:

Accordingly, for the taxability of income from Ponzi schemes, it is not a question of whether the debtor would have been able to serve all creditors if it had theoretically fallen due, but only of whether it complied with actual requests for payment, or in such cases was “able and willing to pay”. This is also the case if he persuades the creditor to reinvest or leave capital and alleged proceeds standing, even if this is done only after a delay.

The “sham” income is taxable as long as “the Ponzi scheme works”, i.e. it has not yet collapsed because new investors were found and enough of the previous ones continued to invest their capital together with interest.

 

In any case, “fictitious” income that is actually voluntarily left standing or reinvested represents a genuine disposal for tax purposes by means of inflow and reinvestment, so that the question of solvency and willingness to pay is in any case irrelevant.

Failure to declare all such investment income is tax evasion. The loss of the entire capital with all the reinvested interest at the end, on the other hand, falls within the non-taxable assets and therefore does not prevent the taxation of the income calculated up to that point.

 

Ways out?

In order for the fictitious returns to be taxable, “solvency and willingness to pay” must be proven by the tax office in case of doubt (decision of the Rhineland-Palatinate tax court dated 17.06.03, ref. 6 V 2563/02). Taxpayers should not conceal the bogus returns, but try to find evidence through the criminal case files that there was no ability or willingness to pay.

After all, criminal initiators often move investor funds to tax havens quite promptly. Often, however, it turns out that they were actually willing and able to make the payments for a long time, compared to the few who wanted income or capital paid out and could not be persuaded to do otherwise – in view of the high returns promised on paper.

In order for investment losses to be deductible, there must be a demonstrable decision from the outset to make these capital investments either as a self-employed person or within the framework of a separate asset-managing corporation.

This requires particularly careful design. Any backdating of contracts in this respect, for example after the first losses have been incurred, would immediately give rise to suspicions of deliberate evasion.

 

“Legal” Ponzi schemes

The same principles apply even if the scheme is not a deliberately fraudulent pyramid scheme, but rather a business model that leads to comparable effects only for economic reasons. Also with such snowball-like systems some public prosecutor’s office deals visibly. While the perpetrators of real snowball systems are often confessed, the initiators of snowball-like systems sometimes see themselves more as victims, with the conviction that everything would have continued to function perfectly well and no one would have lost money if the public prosecutor had not closed down the business or the insolvency administrator had not wound it up. Even in the cell, they still think that they are serving time for something they did not do. In this respect, they are just like the tax evader who is punished for something he did not do – namely, for not paying his taxes.

 

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

 

by courtesy of

http://www.liechtenstein-journal.li/ (Liechtenstein Journal 04/2014)

and

http://www.network-karriere.com (published in November 2014 issue)

and

www.finanztip.de

and

http://www.handwerke.de (Computers in the Trades, July/August 2015 issue)

 

 

 

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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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