In December 2015, the German Federal Ministry of Finance submitted a draft bill for the reform of the German investment fund taxation system (German Investment Tax Reform Act – InvStRefG). The industry and the relevant associations had the opportunity to provide the Ministry with their comments until 15 January 2016.
According to the Ministry of Finance, the purpose of the reform was to reduce complexity, eliminate potential EU-level legal risks, and to prevent tax avoidance models. The changes, which shall take effect from 1 January 2018, will comprehensively reorganise fund taxation in Germany.
Domestic and international (foreign/non-resident) investment funds are subject to corporation tax (at the source of the investment) on domestic dividends and income from securities lending, as well as on domestic real estate and other domestic income. Any corporation tax levied in the form of withholding tax (WHT) is considered paid; both the corporation tax and the WHT rate is 15%. If investment funds want to benefit from a reduction in WHT, they need to apply for a certification of fund status at the responsible German tax office. Once approved, the fund then needs to submit this certificate to the respective paying agent, so the deduction of the WHT is properly applied for the fund.
Special investment funds are not subject to corporation tax if either (1) they exercise a transparency option or (2) WHT is deducted at the investor level for domestic real estate and other income.
Mutual Investment Funds
For mutual investment funds a new, entirely non-transparent tax regime will be introduced which differs strongly from the existing system of transparency. They will therefore no longer be tax-exempt and the look-through principle will be replaced by a cash flow and lump sum taxation methodology at the investor level.
The investor shall be taxed:
The preliminary lump-sum amount is determined by multiplying (a) 70% of the risk-free interest rate used in the simplified capitalised earnings method for the respective year (risk-free interest rate 2015: 0.99%) by (b) the redemption price of the investment fund unit at the beginning of the calendar year.
Distributions will mitigate the lump-sum amount. Furthermore, the amount is limited to the positive difference between the redemption price at the end of the calendar year compared to the beginning of calendar year. In the year of acquisition, the preliminary lump-sum amount is determined pro rata temporis.
Depending on the structure of the fund (equity fund, mixed fund, real estate fund), certain partial tax exemptions can be granted.
In order to preclude double taxation at investor level, the capital gains resulting from the redemption of shares can be reduced by the preliminary lump-sum amounts that have been calculated and reported during the holding period of the “non-transparent” fund.
Special Investment Funds
For special investment funds (private label funds for institutional investors) the current transparency system can be maintained if the special fund opts for it; otherwise, the regulations for mutual funds will be applied.
The determination of taxable income is generally based on the existing transparency principles, but take several modifications into account: for example, neither the formal §5 reporting requirements nor the respective tax certificate are mandatory, however a calculation the income of the fund is still necessary.
The management company of a special investment fund will have to face additional administrative burdens; these include maintaining a share register to track the fund’s direct/indirect investors, ensuring that the number of investors does not exceed the permissible maximum, and submitting a breakdown of income for each individual investor to the tax office.
The draft bill has been sent to the relevant investment fund related associations, and comments have been sent back to the Ministry of Finance as the industry has identified several points of discussion. We are expecting the Ministry to react soon.
For further information, please do not hesitate to contact us.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.