Fund Taxation Alert 2018-13 | KPMG | LU
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Fund Taxation Alert 2018-13

Fund Taxation Alert 2018-13

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Extended deadline for the publication of German tax figures in accordance with section 13 of the German Ministry of Finance’s circular of 8 November 2017.

On 2 November 2018, the German Ministry of Finance issued an update to its previously communicated publication deadline. The newly distributed circular extends the publication deadline of German tax figures in accordance with section 13 (simplification method) of the German Ministry of Finance’s circular of 8 November 2017 from 31 December 2018 to 30 June 2019.

German Bundestag issues amendment to § 2 of the German Investment Tax Act

On 8 November 2018, the German Bundestag passed a legislative proposal to amend sections of § 2 of the German Investment Tax Act (GITA). This decision was supported by a resolution recommendation of the Finance Committee.

The key takeaways and implications of the § 2 amendments are the following:

Equity funds:
 

  • An investment fund qualifies as an equity fund if, according to its investment conditions, its total net asset value (NAV) continuously comprises at least 50% equity (prior to amendment: 51% for equity funds). This enables an increased number of investment funds to be classified as equity funds, and therefore, to qualify for partial tax exemptions.
  • Moreover, a fund of funds can qualify as an equity fund if:
    • First, its investment conditions specifically require the fund of funds to invest in target funds in such a way that an equity ratio of at least 50% is continuously ensured;
    • Second, the investment conditions of fund of funds entail that the published daily equity ratios of its target funds are taken into account for the compliance of the fund of funds’ equity ratio;
    • Third, conditions 1 and 2 are only applied to target funds, which carry out an assessment at least on a weekly basis.
  • In addition, if a target fund specifies an equity ratio higher than 51% in its investment conditions, this concrete higher equity ratio needs to be taken into account for the formal classification of the fund of funds as equity fund. Consequently, this legal amendment enables a target fund to highlight and increase its value as such by permitting the indication of its higher equity ratio.

 

Example:

A fund of fund invests 70% of its total asset value in one target fund. The target fund indicated an equity ratio of 75% in its investment conditions. Therefore, according to the new amendment, the fund of funds shall be classified as an equity fund (70% x 75% = 52.5%).

Prior to the amendment, and without the target fund indicating the concrete higher equity ratio in its investment conditions, the equity ratio of the fund of funds would have been 35.7% (70% x 51 % = 35.7 %). Thus, the fund of funds would not have qualified as equity fund but as mixed fund instead.

 

Mixed funds:

For mixed funds (at least 25% of equity), the same rules shall apply as for equity funds.

Real estate funds:

  • An investment fund qualifies as a real estate fund if, according to its investment conditions, its total NAV continuously comprises at least 50% real estate (prior to amendment: 51%). 
  • Corresponding to the articles for equity and mixed funds, if a target fund specifies a real estate ratio higher than 51% in its investment conditions, this concrete higher real estate ratio needs to be taken into account for the formal classification of the fund of funds as real estate fund.

New fundamental rule for the equity ratio calculation:

  • The newly introduced fundamental rule states that the proportion of equity assets related to the fund’s ‘active assets’ (Aktiv-Vermoegen) is crucial, implying that the denominator of the equity ratio calculation comprises the ‘active assets’. The ‘active assets’ shall not take the fund’s liabilities into account.
  • The amendment additionally allows for a simplification rule: instead of the ‘active assets’, the fund’s total NAV can be used as the denominator (i.e. taking into account the fund’s liabilities). If this approach is chosen, the numerator consisting of the equity-financed portion of the assets must also be proportionally reduced by liabilities related to equity assets. Consequently, the simplification method takes into account both the net values of the numerator and the denominator.
    ➞ Effectively, the simplification rule shall lead to the same result as the new fundamental rule.
  • If the fund is classified based on the simplification method, this must be clearly indicated in its investment conditions.


Example:

1. Calculation of equity ratio prior to amendment:

Active
  Passive  
Equities 55 Equity capital
(net asset value)
90
Receivables  20 Liabilities  10
Cash 25    

 

Equities: 55
Net asset value: 90
Equity ratio: 55 / 90 = 61.11%

2. Calculation of equity ratio according to the new amendment (fundamental rule – ‘active assets’):

Active
  Passive  
Equities 55 Equity capital
(net asset value)
90
Receivables  20 Liabilities  10
Cash 25    

 

Equities: 55
Receivables: 20
Cash:   25
Equity ratio: 55 / 100 = 55%

 

3. Calculation of equity ratio according to the new amendment (simplification rule – ‘NAV’):

Active   Passive  
Equities 55 Equity capital
(net asset value)
90
Receivables  20 Liabilities 10
Cash 25    

 

Equities: 55
Net asset value: 90
Liabilities 10
Equity ratio first step: 10* (55/100) = 5.5 ➞ liabilities related to equities
Equity ratio second step: (55 - 5.5) / 90 = 55%

 

Transitional provisions:

One should note that in order to avoid the need for a modification of a large number of current investment conditions, the Bundestags’ legal proposal includes transitional provisions for previously § 2 - compliant funds. Investment conditions of funds, which met the requirements in terms of equity and real estate ratio prior to this amendment, do not need to be adjusted if the fund was launched before 1 January 2019. For funds that will be launched after the said date, an assessment of the wording of the investment conditions and, possibly, modifications of investment funds will be necessary in order to qualify for the status of equity, mixed fund or real estate fund, respectively.

The amendment is expected to be confirmed by the German Federal Council on 23 November 2018.


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