Is Interest from Foreign Life-Risk Insurances Subject to Taxation?

The BFH (re VIII R 47/01 judgment of March 1, 2005, published February 15, 2006) ruled if and how interest obtained from investing in life-risk insurances abroad are to be taxed.


Anthony, Bob, and Charles own – each by a third – a securities deposit at a Swiss Bank mainly containing fixed interest securities in different foreign currencies. This deposit was financed by the same bank that holds the deposit. Anthony, Bob, and Charles were not paying off their debt. From the acquired interest from their investment, the loan interest as well as the premiums for the life insurance were financed. As the life insurances matured in 1986, the debt was paid off. They received about DM 2.552 mill. Their German tax office assessed this input of interest and added another DM 2.224 mill. for taxation after an audit because it assumed that this further income was taxable in Germany.

Anthony, Bob, and Charles appealed this decision without success. The Tax Court disagreed with the tax office and upon appellation of the tax office Anthony, Bob, and Charles had their opinion affirmed by the Federal Tax Court.

Anthony, Bob, and Charles argue that the interest received is tax free in Germany because their insurance and the cashing-in met all the requirements of the law. The tax office argued that only if the insurance premiums were deductible as extra-ordinary expenses would they be tax-free.

The Federal Tax Court denied tax liability. The opinion of the Federal Fiscal Court follows the prevailing opinion of legal publications and contrasts the opinion of the Federal Ministry of Taxes. This legal rule just stipulates that premiums paid to insurances to set up a capital covering old-age security are tax exempt if 1.) the surplus is not cashed before 12 years after the policy has been obtained, 2.) before 60 years of age or for supplementing a disability pension, or for supplementing a disability pension or widows' and surviving dependents' pension. Generally, such income is not subject to taxation.

Published on the old CMS: 2006/12/21
Read on the old CMS till November 2008: 890 reads


Additional information