Fund Taxation Alert 2017-14 | KPMG | LU

Fund Taxation Alert 2017-14

Fund Taxation Alert 2017-14

German Investment Tax Act 2018: time to act now!

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German Investment Tax Act 2018: time to act now!

The German Investment Tax Act enters into force on 1 January 2018.

With three months left it’s time to review where you stand and tick off what’s still on your to-do list.

There are certain strategic and operational actions that fund managers should review carefully to ensure that funds are taxed correctly in Germany. As there is no grandfathering rule considered, foreign investment funds established before 2018 will be significantly affected by the reform.


Key action points to tackle before 31 December 2017

Actions   

Status Certification

  • apply for the new “Statusbescheinigung”

What?
The Status Certification identifies funds as investment funds for German tax purposes and allows taxation at the reduced rate of 15% instead of 26.375% (including solidary surcharge) on German dividends (automatic taxation), real estate, and other income from a German source.


How?
The request must be addressed to the Bundeszentralamt für Steuern (BZSt) in case of foreign investment funds. The request must be made at the sub-fund level disclosing the shares classes. The certificate will remain valid for three years upon confirmation by the BZSt. Whenever the requirements confirmed in the Status Certificate change or cease, the fund must notify the BZSt and return the Status Certificate.

In order to obtain a Status Certificate, the vehicle must qualify as an Investment Fund in the sense of §1 of the German Investment Fund Tax Law 2018 (hereafter GITL 2018) and further disclose which type of investment fund the vehicle is classified as. The fund classification needs to be performed in accordance with rules contained in the GITL 2018.


When? 
The Status Certificate must be requested before 31 December 2017 in order to be applicable as of January 2018. In principle there should be a transition period until March 2018; however, it is very likely that the income received in absence of a Status Certificate will be taxed at the full rate of 26.375%.


Consequences
The absence of a Status Certification will mean a higher tax rate on German income (26.375% instead of 15%) at the fund level as well as taxation of income which is currently not taxable for investment funds (e.g. income from target funds). A reclaim can in principle be filed within 18 months following the payment. However, the strict deadline requires to be clearly and consistently monitored and a Status Certification must also be requested to prove that the foreign vehicle meets the requirements based on the German law as outlined above.

Fund classification:

  • Adjustment of legal documents 
  • Calculation and reporting of (daily) equity quote
  • Monitoring and reporting active breaches

What?
For the purpose of compensating potential double taxation, German investors can generally benefit from a partial tax exemption of the investment income, provided that the respective investment fund is classified as one of three types:

  • Mixed Fund
  • Equity Fund
  • Real Estate Fund

The tax exemption rates vary from 15% up to 80% depending on the classification of the fund and the type of investor, i.e. private individuals, individuals holding the participation as part of their business assets, or corporate/institutional investors.

The classification should be performed in conjunction with the application for the Status Certificate. In the majority of cases it will require an in-depth analysis.


How?
The classification depends largely on the wording of the fund’s legal documents and on predefined equity/real estate quotes. Equity funds must continuously invest 51% of their value in equity participations based on their basic documents (i.e. prospectus). Mixed funds must invest at least 25% in equities and real estate funds at least 51% in real estate or real estate companies. To be “transparent” for other funds of funds, investment funds should report a daily equity quote to e.g. WM Daten Service or another qualified data provider.


When?
To comply with the new regulations, investment funds that are distributed to German investors should amend their prospectus to meet the requirements above within the interim period ending 31 December 2018.

In addition, a self-declaration on the fund classification will be required so as to ensure a partial tax exemption for the benefit of German investors as of January 2018.

Finally, your funds should be able to calculate and report the daily equity quote as of 1 January 2018.


Consequences
If the status changes, investment funds have to report the changes to the German tax authorities and to WM Data. In addition the investors of the fund should be notified about the new classification. It is therefore strongly recommended to perform an analysis of what type of funds (bond, equity, mixed, real estate funds) are distributed in the German market.

Tax exemption application:

  • Reduced tax rate for charitable organisations and pension funds

What?
The German tax reform foresees other features for tax-exempt investors. Income should be tax-exempt upon request of the fund if investors in the fund are:

  • charitable/non-profit organisations, foundations based on public law, or legal persons under public law; or 
  • from pension schemes (i.e. pension funds) in the sense of the German law.


How?

The application requires a detailed analysis of whether the foreign pension fund complies with the requirements laid out in the German law. It is necessary to declare the potential tax status of the fund in the above-mentioned application for the Status Certificate. Furthermore, significant adjustments in the legal documents of the funds may become relevant to ensure the eligibility for tax-exempt investors.


When?
To comply with the new regulations, investment funds that are distributed to German investors should meet the requirements above as of 1 January 2018.


Consequences
If the above requirements are not met, a full taxation on German income will be the result.

 

Special Investment Funds based on German perspective

 

What?

The current regime of fiscal transparency will remain applicable for investment funds meeting the requirements for being considered a Special Investment Fund (SIF) from a German perspective, provided that they have opted for it. SIFs can be attractive especially for institutional investors or pension funds to benefit from their transparent status.

To be classified as a SIF, investment funds must meet certain regulatory and exclusive requirements, for example: shares of the investment fund must be held, directly or indirectly, by a maximum of 100 business investors; the investment fund must therefore reserve an exceptional right of termination.


When?
To comply with the new regulations, investment funds that are distributed to German investors should meet the requirements above as of 1 January 2018.


Consequences
SIFs can choose between a transparent and a non-transparent taxation treatment. This is a one-time decision.

The taxation system for SIFs requires tax reporting on a daily and annual basis.

If the above requirements are not met, the fund will not be seen as transparent which leads to a full taxation on German income.


KPMG has set up a task force specifically focusing on German fund taxation as well as the German Investment Tax Act reform. This is to support you with current questions and challenges you may be facing. KPMG Luxembourg can help you to ease your current and future tax obligations.

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.

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