On 16 December 2015, the BMF published a draft bill for an act to reform taxation on investments (Investment Tax Reform Bill, Investmentsteuerreformgesetz – InvStRefG).
It covers all investment funds within the meaning of the German Capital Investment Code (Kapitalanlagegesetzbuch), i.e. Undertakings for the Collective Investment in Transferable Securities (UCITS) as well as Alternative Investments Funds (AIF). However, the proposals also apply to exceptions in the German Capital Investment Code, for example to holding companies and securitisation special purpose entities.
The draft bill defines two separate and independent taxation systems.
A simple, accessible and easily administrable taxation system is to apply to public investment funds. The taxation rules are to be designed so that they can be implemented almost entirely without any contribution from the investment fund. The taxpayer is to be given the opportunity to substantiate the actual amount of his income. Otherwise, a flat-rate taxation applies which is to be determined on the basis of the basic interest rate pursuant to the German Valuation Law (Bewertungsgesetz). In order to avoid flat-rate taxation, the taxpayer must explain the actual basis for taxation and prove its accuracy.
The current "semi-transparent" taxation system is to continue to apply to special investment funds where, generally, only institutional investors can make an investment. "Semi-transparent" means that in the case of special investment funds not all income is allocated to the investor. Any allocation must in fact be based on an express statutory instruction. As the number of investors in special investment funds is limited to 100 and all investors are known, compliance with highly complex taxation rules can be ensured by way of a determination procedure. In effect, special investment funds with certain earnings are subject to corporate income tax. The partial corporate income tax liability can, however, be avoided by exercising what is referred to as a transparency option. As before the investors still pay tax on the distributed earnings, dividend equivalents and on profits and/or losses from the sale of special investment units pursuant to the tax regime which applies to the respective investor.
Furthermore, the draft bill intends to prevent arrangements to avoid taxation of dividends. The intention is, in particular, to prevent foreign investors from making arrangements before the dividend record day to sell or lend their shares to a taxpayer who is entitled to a tax credit or reimbursement in order to avoid withholding tax on income from capital. The eligibility for credits or reimbursements of withholding tax levied on dividends is to be made dependent in effect on the taxpayer holding the shares for a certain minimum period and carrying a certain minimum level of financial risk for that period.
An earlier draft version for the new investment tax law envisaged an extension of the taxability of the sale of free float shares (<10% participation in incorporated companies) to gains on sale (Sec. 8b KStG). However, the taxability of free float shares is not to be pursued any further and was thus omitted from the current draft.
The new investment tax law is intended to enter into force from 01 January 2018.