Warning: Executive Investment Bonds (EIB) -taxation

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So, after much research and talks with experts I am now in a position to write a warning that may be very important for many Expats in Germany. Because a large number of IFA companies (starting with TheCompanyThatMustNotBeNamed but also many more like this) have sold to residents in Germany so-called "Executive Investment Bonds" from Skandia/Old Mutual with the idea to save/evade taxation on ongoing investments.

 

While these EIBs are apparently indeed free of ongoing taxation in the UK, this is not so in Germany. In Germany - according to my research - they are undergoing what is called "transparente Besteuerung".

Which means, the assets in this "bond" are being taxed as if they were held be the investor directly.

 

As long as you keep them from start to end without selling and re-investing, there is no problem with taxation: it will just be taxed at the end when you sell/surrender the entire plan with the capital gains tax on profits realized.

However, the idea of these bonds is that you can invest in investment funds and other assets (usually there are several structured notes in them, i.e. derivatives with short durations) and sell when convenient or reap in profits from assets with just a few years duration and then re-invest your money without taxation in the meantime.

This is not correct under German tax law.

These plans are considered "vermögensverwaltende Versicherungen" and, as said above, are prone to undergo "transparente Besteuerung". I.e. in every year where you sell funds or where a structured note matures and pays out, you'll have to declare the profits that you made in this year with your tax declaration. Just as if you owned the asset directly and yourself and not via a life assurance/bond.

 

Which means: if you have already owned such an EIB for a few year AND if you have had structured notes maturing with profits or sold (for rebalancing purposes, for instance) shares or funds with profits and then directly re-invested AND if you have not reported these profits in the yearly tax declaration, you have legally commited witholding of taxes or tax evasion ( § 370 Abs. 1 AO)...which means you'll be taxed with penalities and even fines are possible.

 

Below I give more legal details as I found them - so that you can contact your tax advisor/accountant and discuss this and be able to make the next steps. Since I am not a tax advisor, this can by now means be read or considered to be tax advice by me. It is just a friendly warning from your's truly Starshollow that if you own such an investment product, you could unknowingly commit tax evasion under German law and face serious and expensive consquences in the future.

 

Therefore, if you own an investment plan which is set up based on a life assurance/bond and contains your investments and you have never ever thought to report profits from it, please contact your own tax advisor NOW. And check with him your existing plan on the following important parameters, i.e. if they apply to your plan, too!

 

1. The first legal threshold from the German taxation side in order to have an investment under a life insurance umbrella exempt from ongoing taxation is the coverage of the biometric risk (usually death).

German laws require at least a risk-coverage of 10%, i.e. in case of death the insurance needs to pay out 10% more than paid it (or than surrender value).

 

The Skandia/Old Mutal EIB I have seen sofar already fails this requirement as it offers only 1% death coverage (see page 4, point 3.2. as well as more detailed descriptions about this later in the policy) .I would therefore assume that this alone is reason enough for the German Finanzamt to reject the life insurance umbrella and basically tax the insurance holder as if he’d own the funds and other assets directly. I.e. any sale during a year becomes taxable during that year if there is a profit. This erases the only point that makes such an EIB potentially attractive from a taxation point of view if you hope for deferred taxation at the end when you close or surrender all assets and then simply pay capital gains tax on the total profits. 2. Then there are three points which all-together must be fulfilled (even if there would be a 10% death coverage) in order to make such a life-insurance plan a “Vermögensverwaltender Versicherungsvertrag” and thus liable for the “transparente Besteuerung”. These three points are as follows:

 

a. Is it a life insurance contract with a separate/individual management of assets especially arranged/put together for you?

 

b. Is the invest possible into more than shares of publicly traded investment funds and ETFs

 

c. Can the policy owner directly or indirectly decide or take influence about the sale of assets and re-investment into new/other assets

 

 

 

From looking at the SKANDIA/OldMutual EIB I think it fulfills all these three requirements beyond doubt:

 

For a) it is obviously clear that the EIB is constructed as a very personal and individual policy that is set up especially for a client and his assets/capital only.

 

For B) here point 8 at page 8 of the Ts&Cs I have seen list a large a number of assets that can be invested into with this plan which are way in excess of investment funds or ETFs (it might be that some structured notes which only invest in certain index could be acceptable under this clause, but I am not sure about this and would refer this rather to a real expert on tax law interpretation). The policy holder can invest directly into stocks and shares, bank deposits and all kind of “external funds” where the limit is only that perhaps Skandia/Old Mutual might not purchase them for into the "Bond" for technical reasons.

 

Consequently in my opinion the Ts&Cs are also failing on point B) as they allow investments into more and different assets classes than enumertad in the relevant German tax law, which is § 20 Abs. 1 Nr. 6 EStG, btw.

 

 

 

Now, c) is quasi self-evident: point 11 of the Ts&Cs I have seen from the Skandia/OldMutual EIB clearly says that all the investment responsibilities are with the insurance holder/investor. All decisions are with the client or with his authorized fund advisor (who, as he acts on your behalf counts as if it was yourself). Point 13 of the Ts&Cs even says explicitly: “How can you choose and change investments”. Here especially the change of investments in 13.3 is very relevant . The EIB only provides a “Dealing Desk” to carry out the policy holder's orders.

 

Therefore it looks like the Skandia/Old Mutual EIB fails on all three counts and there you have it: if that is the case, transparent taxation is required in Germany which means you’ll be taxed as if you own the funds and assets directly. And this is just an example, there are clearly more such products outthere, sold as tax-attractive offshore investment bond of sorts.

 

While the simple increase in value of a fund is underlying deferred taxation in Germany anyway, i.e. you’ll only pay capital gains taxes when you realize the profits, any sale during the year and reinvestment creates a taxable event. You could balance losses and profits in a year in your tax declaration.

 

But if I am not mistaken, the problem is this for past tax declarations: if the tax note already became effective for a given year and you’ll file retrospectively now, only the profits count but not the losses anymore. At least that is what I understood from the proceedings against Uli Hoeness – but again, this is and cannot be tax advice here from me and a licensed and qualified tax advisor needs to answer this and explain it to you.

 

I hope I have not spoilt the day of too many folks here on Toytown. I have currently 3-4 such cases on my desc - basically because people have been tricked into these investments as part of a QROPS transfer which they in the meantime have found out was and is very expensive and not in their best interest. If, as is often the case, the advisors in Germany are not properly licensed and/or have given insufficient advice, there is a chance to have these deals revoked entirely as cases of malpractice. Some clients are therefore in contact with one of the leading German lawyer firms for representation of such cases against the German based IFA branches of well-known companies to this regards.

 

If you like me to check out if what you have falls under this category, do so - happy to help. But please do not send PMs, use the link below and send an email. Same if you like to know more about the lawyer firm who is about to go after some of the bad guys soon and which could help you, too.

 

Cheerio

 

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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