Last week, the German Ministry of Finance made available a discussion draft of an Investment Taxation Reform Act (Investmentsteuerreformgesetz – InvStRefG) for consultation with the relevant associations. The new rules are intended to come into force on 1 January 2018.
The draft legislation introduces important changes, for example it shall henceforth be distinguished between two independent taxation regimes: (i) a non-transparent taxation system which generally applies to all AIF or UCITS and (ii) a semi-transparent taxation system for so-called "special investment funds”. The reform is of importance to asset managers who distribute funds to German investors as well as to asset managers holding German shares or German real property in a fund.
The most significant changes can be summarized as follows:
- Non-transparent tax regime
- Abolition of transparent taxation and introduction of a non-transparent taxation system based on the separate taxation of investment funds and investors for all types of investment funds (UCITS and AIF including single investor funds) regardless of their legal form, with the exception of partnerships. Partnerships are only within the scope of application if they qualify as a UCITS pursuant to section 1 para. German Investment Act (KAGB) or if their business objective serves the purpose of pension asset pooling.
- Abolition of tax reporting requirements for investment funds. In particular, the requirement to publish so-called deemed distributed income (DDI) and other German tax figures in the Federal Gazette (Bundesanzeiger), which was perceived as burdensome and costly by many fund managers, is to be abolished.
- German and non-German funds are subject to a 15 % tax on income from German shareholdings, German real estate income or other German source income. German dividends will be subject to a 15 % withholding tax. The tax on German source income is introduced in order to establish a level playing field for German and non-German funds and to comply with European law.
- Investor taxation on the basis of a lump-sum amount replaces the taxation of deemed distributed income (DDI). The lump-sum amount is attributed to the investor on December 31st of each year; it is calculated as the NAV per share at the beginning of the calendar year multiplied by a factor that depends on the statutory base rate and is adjusted annually – currently the lump-sum amount would equal 0.80% of the NAV per share. Actual distributions reduce the lump-sum amount which is limited to the actual increase in value of the fund shares during the calendar year.
- Partial exemption of income from investment funds which mainly invest in shares or real estate on an ongoing basis. The partial exemption does not only apply to distributions but also to disposal or redemption proceeds as well as to the lump-sum amount. The partial exemption amounts to
- 20% of the earnings if at least 51% of the fund's NAV are invested in shares or equity funds;
- 40% of the earnings if at least 51% of the fund's NAV are invested in German real estate;
- 60% of the earnings if at least 51% of the fund's NAV are invested in international real estate.
- Investment funds are exempt from trade tax provided that the objective purpose of the respective fund is limited to the investment and the administration of its assets for the collective account of the unit holders and that the fund does not operate as a commercial business in relation to the assets held.
- Transparent tax regime (special investment funds)
- Precondition for the classification as a special investment fund is compliance with specific investment restrictions (similar to the current restrictions under 1 para. 1b Investment Tax Act). The maximum number of investors is 100; natural persons may not invest in special investment funds - neither directly nor indirectly via a partnership.
- Investor taxation continues to be carried out according to the principle of transparency, i.e.
- there is no taxation at fund level if in relation to German dividend income withholding tax certificates are issued to investors or if the fund withholds German withholding tax from German real estate income;
- at investor level distributed income, deemed distributed income and profits from the disposal of shares in special investment funds are subject to taxation.
- Regarding taxation of AIF-partnerships there are no substantial changes. Transparent taxation applies on the basis of the general income tax principles; provided that the AIF qualifies as asset-managing partnership, it is neither subject to income tax nor to trade tax.
- Value Added Tax on Management Fees
- The tax exemption for management fees does principally persist. However, precondition for the application of the tax exemption is that the respective fund does fulfill the specific investment restrictions referred to above in relation to special investment funds. Consequently, the investment restrictions for special investment funds are indirectly applicable to any investment fund. As a result, the management of closed-ended funds continues to be a taxable service.
- Taxation of capital gains from the sale of shares in portfolio shareholdings
- In addition to the reform of investment taxation, the draft law contains the previously announced abolishment of the preferential treatment of capital gains from portfolio shareholdings (i.e. holdings of under 10%) for corporate tax purposes. This new legislation is expected to apply for the first time to capital gains realized after the 31st December 2017. Until then the preferential tax treatment continue to be available.