Peaceful retirement - Austria Tax IRA Insurance

Avoid Tax Evasion: IRA and Insurance Wrappers—2 rules to follow

Peaceful retirement instead of a stressful tax audit

IRA (individual retirement account in the USA) and insurance wrappers are complex topics in law. The main reason is that by principle foreign pension or insurance products are involved that need to be assessed by the national law. The result can be counter-intuitive. The purpose of this article is to warn against potential issues and high legal fees, rather than to provide any general solution.

Long-term tax planning is important.
What is the last time your tax attorney asked you about your future plans?

What is a wrapper?

A wrapper as a legal term is an asset or transaction that is in its nature one thing but is labeled as another. An example is a contract that is labeled as life insurance but has the same terms and conditions as an investment account. This “mislabeling” is often motivated the specific factors, and lower tax might be one of the most common. Of course, the issuer of such an arrangement is quite often cautious about constructing the contract within the legal restrictions of their jurisdiction. Should the tax authority at their headquarters question these agreements they already might have a good legal defense prepared.

Example? AOC Insurance Broker offering “Insurance Wrappers” (link)
(Note that this example is illustrative, and is not meant as a legal assessment of this product)

Where is the problem?

The issues may however arise for the unknowing international consumer, who has to declare their taxes in a different country. So it can happen that even though a contract is labeled as pension insurance (e.g. UK), the tax for capital gains applies in the country of the consumer’s residence (e.g. Austria). Since the freedom of capital has been increasing—and is compulsory in the EU—there is nothing stopping the unknowing consumer to make a pricy choice in terms of taxes.

What is your experience?
Has your tax attorney reviewed all your long-term contracts?

So what is an investment and what is an insurance?

It is hardly possible to come up with a perfect general formula to assess every contract. The legal opinions may differ. When it comes to pension and life insurance a couple of important factors can be named: (a) level of control (e.g. whether you can decide where the capital will be invested) and (b) the investment risk ownership (i.e. who has to cover unexpected losses). A quite specific topic is the American Individual Retirement Account (IRA) and its taxation in Austria.

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The easy slip to negligent tax evasion

It is important to note, that taxation can be triggered even during the saving phase—although there has not been any payout from the funds yet. In Austria, it is the duty of the taxpayer to declare such foreign capital gains. The tax authorities have been increasing the efforts to prosecute negligent tax evasion as a crime.

Side note to criminal proceeding

A criminal proceeding is much different from the usual tax audit process. The legal period of limitations is 10 years but does not start in case of ongoing activity. This means that if the contract is still ongoing the unpaid taxes can be under circumstances calculated for multiple decades. Another important difference is the penalties that by principle are in the multiples of the unpaid tax.

The authorities may find out

In 2016, the EU created an automated information exchange system involving all financial institutions, including insurance providers. Austria and Switzerland joined in 2017, with the first data exchange towards the end of 2018. This means that if you have purchased insurance or another financial product in a country participating in the exchange and have tax residence in the EU, this information is included in the annual data exchange.

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Insurance and IRA tax in Austria

Better safe than sorry: two simple rules

These two simple rules should help you to avoid any issues with the local tax authority at a later point:

Rule #1:
Consult a tax specialist before any future insurance purchase abroad

If you plan to purchase foreign life or pension insurance—or any insurance to secure financial funds for a later point—it is a most reasonable precaution to consult a specialist in your country of residence. The tax potentially due may have a great effect on your decision-making—the foreign contract may not be as profitable if capital gains tax is due.

Rule #2:
Consult and potentially disclose your current saving strategy in full

It is not surprising that people are secretive when it comes to their financial funds and retirement plan. Often—even if they already have a professional advisor—they don’t provide a full picture of all accounts, savings, contracts, and funds they hold. This might not be the best idea. Engaging a professional may protect from negligent tax evasion, however hardly if the topics in question were kept secret from them. It might be reasonable to discuss your current saving and retirement strategy in full. Should there already be unpaid tax from the past, your advisor will most likely suggest voluntary disclosure to avoid any possibility of a criminal proceeding.

It is good to ask your tax advisor about their confidentiality duties first.
Do you have an experience to share? Please leave a comment and let us know.

Conclusion

Things may not always qualify as insurance for tax purposes even though they are labeled as such—so-called wrappers. This can especially be the case with foreign pension and life insurance that were designed to fit the rules of a foreign jurisdiction. Such contracts may lead to negligent tax evasion. The best way to protect yourself is to be aware of this topic and consult a tax specialist before any purchase of such insurance. We also strongly recommend a tax review of your current savings strategy from a tax perspective if there are any foreign contracts in question.

Please note that this article is illustrative and cannot provide all specifics regarding this topic. Your case may differ. We always recommend consulting an experienced specialist before making decisions.

Read more…

– Example: AOC Insurance Broker offering “Insurance Wrappers” (link)
(Note that this example is illustrative, and is not meant as a legal assessment of this product)

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