*by Ralf W. Barth, pecuniary loss liability broker (www.rwb-finanz.de) and Johannes Fiala, attorney (www.fiala.de)
Stupid German money: In the 1990s, the Americans were delighted with the money that German closed-end film funds collected. In the USA, these funds were then referred to as ‘stupid German money’ in view of the risks and flops.
The case Victory: Who took part e.g. in some Victory film funds as investors, in order to lower its tax load, suddenly received in the last years an inconvenient and expensive letter of its personal domicile tax office: On the occasion of an audit with medium fund offerers the fund construction had been examined ? the tax authority had retroactively withdrawn the loss assignments attractive at that time (letter to the case Victory: here click). For the investors concerned, this meant that they had to pay a hefty tax arrears amounting to the taxes they had previously “saved”. In addition additionally interest for up to eight years, per month 0.5% came after ? 233a AO. There summed up so some considerable sum up, which some investors surprised and coldly caught (tax assessment: here click). Effectively, the matter has become very expensive for the investors, since they can no longer deduct the interest since 1999, § 12 No.3 EStG. Roughly estimated, the effective burden for the investor amounts to then retroactively 1% per month. Quite apart from the fact that the investment objectives which were built to a significant extent on the tax savings, can no longer be achieved.
Basic question: Many intermediaries ask themselves how far their tasks and their liability extend if, for example, a capital investment develops contrary to the data and tax forecasts promised by the initiator in the prospectus. Media funds have so far advertised loss allocations at the usual and known levels. Advisers often used this as an argument with clients, making explicit reference to the figures and sums given in the prospectus where appropriate. Customers also strongly aligned their investments with these offered and tax audited prospectuses. If loss allocations are retroactively revoked, clients will certainly blame these enormous, short-term charges on intermediaries. In the worst case scenario, clients will seek to hold intermediaries accountable for the adverse effects.
To what extent do customers have the right to know the exact background through your intermediaries? Do the intermediaries have to insist (legally) on being told the true background for liability reasons? There could be also omissions of fiscal advisers with the medium fund, which led by not in detail accomplished examination to the customer disadvantage. What handling and expectation do clients (and VSH insurers) have of intermediaries when these investigations are not even considered by the initiator?
Reporting obligation often overlooked: Quite a few initiators have tried in the past to drag their legacy over the statute of limitations. From the point of view of pecuniary loss liability, such possible (damage) cases must be reported as soon as they become known. Even if no specific claim has been made to the policyholder / intermediary at this point in time. It should be noted that the reporting deadlines here are very short ? within 1 week after becoming known.
In many cases, no coverage for profits and yields: The scope of coverage in the pecuniary loss liability insurance for brokers generally excludes from the outset benefits that have arisen because the promised returns, profit expectations and developments have not materialized.
The intermediaries are obliged to pass on to the customers any knowledge of insufficient creditworthiness of investment companies, a fund or an initiator, or also to carry out investigations into the aforementioned companies and persons.
In this context, intermediaries must make themselves known in advance and examine the prospectuses, the documents and the providers in a proper and professional manner. If they cannot do this, they are basically not allowed to mediate. The only possibility is then to inform the customers in advance of the lack of testing and to disclose to them any possible disadvantages that may arise as a result. The intermediary must also inform the customer of any negative developments in the investment of which he becomes aware during the term. If he does so, then he probably has the advantage (if he documents this) that the statute of limitations may already begin from then on (at the latest now the customer knows the damage). If the intermediary fails to do so, an additional accusation may arise: “If the intermediary had informed the customer right at the beginning (of the negative information / press), then the customer could still have reacted, if necessary?
Generally no cover for permitted legal and tax advice: Many cover concepts exclude tax and legal advice in connection with the brokerage of investments. Especially in the case of tax saving models, the later reproach of the investor that the promised advantages did not materialise leads to the fact that most VSH insurers refer to the fact that such damages are excluded from the insurance cover. Prospectus liability
From a VSH point of view, it is particularly important to check whether the scope of cover includes or excludes liability claims based on the fact that a claim is made against the intermediary due to incorrect content of the prospectus or due to information that deviates from the prospectus. Recommendations for the intermediary: Due to the different coverage concepts of various VSH providers, it is advisable to have an independent insurance broker prepare offers in order to identify existing gaps and avoid them if possible. Also in the area of legal and tax advice – permitted as so-called auxiliary business – there is normally no VSH coverage: Therefore, the intermediary should always and constantly refer such questions, demonstrably documented, to an (insured) honorary professional. �
by the way: a look at notarial deeds shows that notaries (although they would be authorised to give tax advice) almost without exception exclude precisely this complex area from their advice and refer the client to other advisers. In the event of a claim, it is generally advisable to work with a broker who has a solid claims management record and appropriate experience in the segment.
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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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