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LONDON-German insurers and reinsurers are being socked with huge unforeseen tax bills because German tax authorities have disallowed tax- free investment income from former subsidiaries in Dublin, Ireland.

Last week, the Hannover Re Group reported a record 60% increase in its 1996 after-tax profit to 108 million deutsche marks ($60.9 million). The group's stellar results would have been even better, however, had it not had a whopping 146% increase in its taxes, bringing them to a total of 118 million deutsche marks ($66.6 million) at the end of last year. That compares with 48 million deutsche marks ($27.1 million) in taxes for 1995.

Wilhelm Zeller, chairman of the executive board of Hannover Re, explained at a news conference in London last week that the tax bill resulted from a routine five-year tax audit by the German tax authorities for the years 1988 to 1992.

During this audit, the tax authorities disallowed tax-free investment income earned between 1989 and 1992 in a Hannover Re investment company run by one of the German banks in Dublin's International Financial Services Centre.

German banks encouraged German underwriters in those years to set up investment companies through the banks' Dublin subsidiaries in order to accrue investment income and lower costs, according to Mr. Zeller. He believes just about every German insurer and reinsurer set up such companies under the banks' supervision, so the tax issue "is not just a Hannover Re problem but a German insurance problem."

Indeed, Dublin's reputation