Tax sells!? - Efficiently manage tax risks in investments and reduce liability

Saving taxes is still one of the best selling points in Germany. But it is a double-edged sword, because taxes are a challenge in all phases of investments: Even with good tax planning, the laws or even the interpretation of the laws can change during the term of the investment and thus have a significant influence on the return - and rarely to the advantage of all parties involved!

Even more unpleasant is the question of who is responsible for the deterioration in returns or earnings: the management, the asset or fund manager, an investor / stakeholder or even the tax advisor? Ultimately, the search for responsibility for tax damage is unpleasant as well as time-consuming, costly and nerve-wracking. So what to do?

Good planning is already "half the battle" when it comes to tax risks: Taxes are tricky because, in addition to financial risks due to unplanned liquidity outflows, they very quickly entail reputational risks and criminal risks.

Tax risk management is an important success factor, especially in the area of investment and asset management, because the management of investor funds is subject to the high requirements for investor protection on the one hand and the administrator can both increase his reputation and significantly reduce his liability with forward-looking risk management on the other.

This is because the widespread assumption that "taxes are the responsibility of the investor according to the terms of the contract" only applies to a limited extent: Of course, the investor in an investment fund must pay taxes on his income; but it is also clear that in times of falling yields and current revenues, especially in the area of institutional real estate investments, the question is asked who can be held responsible for the fact that the return does not reach the forecast values. Did the investor make a mistake when choosing the fund? Or has the asset or fund manager not properly handled the tax matters at fund level? Or was it just the "evil" tax office in the end?

In principle, the manager has several options for this: In certain cases, agreements can be made with the tax authorities in advance of investments (binding information). This usually takes time and it is also not clear whether the high formal requirements can be met and whether a (positive) answer will come back at all in the always tight schedule.

In ongoing operations, the proactive tax advisor who points out potential risks from changes in the law at an early stage is of course the "asset" par excellence. But he has his own professional liability breathing down his neck and cannot assume the tax risk for liability reasons.

What very few German asset and fund managers have in their toolbox so far is a very common way of eliminating tax risks among Anglo-American investment funds: namely through tax insurance.

Tax insurance can be used to transfer a tax risk to an insurance company. If the tax office then assesses a tax, the insurance company usually makes an advance payment and pays the tax, while the proceedings are conducted with the tax office and, if necessary, also the tax court. Because whether the tax risk occurs or not is only clear after these lengthy procedures have been completed - and can easily outlast the term of a fund, which is usually ten years. The manager thus not only protects the liquidity of the fund, but also saves himself the unpleasant practice of asking investors to pay afterwards.

So as soon as a tax risk arises at some point, the administrator can quickly clarify whether it is insurable, obtain offers from the specialist broker for tax insurance, inform the investors and obtain their approval to cover the costs of the insurance. The good thing about this is that if it is proven by resolution that investors may have decided against such risk hedging, the question of the manager's liability should at least be eliminated.