Tax liability of a life insurance policy after debt restructuring

The German Federal Fiscal Court has highlighted a new stumbling block in the rescheduling of a loan secured by a life insurance policy, which may lead to a tax liability on the interest income from the insurance policy.

The interest from an endowment policy that serves as collateral for a loan agreement is tax-exempt under certain conditions. These conditions include that the loan serves directly and exclusively to finance an asset intended to generate income (e.g., rented property). The Federal Fiscal Court has now clarified that a forward loan secured by life insurance does not meet this requirement if it is higher than the residual debt of the loan to be rescheduled. It did not matter that the excess amount was only used to finance the commitment interest and other rescheduling-related expenses and thus also for expenses related to the financed asset.