The German Investment Tax Reform Act published in the Federal Law Gazette on July 26, 2016 raises a great number of practical questions – notwithstanding the objective to simplify the taxation of investment income which has been emphasised during the entire legislative procedure. The draft circular released by the Federal Ministry of Finance aims to clarify some of these questions.
The German Investment Tax Reform Act dated July 19, 2016 introduces inter alia a new German Investment Tax Act (“GITA 2018”) with two completely different taxation systems: one taxation system for investment funds and another for special investment funds (for a description of the core elements of the GITA 2018 please refer to section no. III. below).
The new rules which will come into effect on January 1, 2018 and will cause significant implementation effort along with practical interpretation queries. The draft circular was therefore awaited with considerable expectations. In the light of this, it is regrettable that the circular falls short of these expectations in two different ways:
In detail, the circular deals with the following topics:
In the following, we summarise the most relevant contents of the circular for you.
With respect to the scope of application, the circular unsurprisingly states that if an investment vehicle would qualify as an investment fund, the publications and statements of the German regulator (BaFin) can be referred to with however unbinding effect. From a practical point of view, this should only be relevant in the case of an abuse of law.
In addition, the content of the circular mostly corresponds to the perceptions that are already in place under existing investment regulatory law.
In relation to the legal definitions, there are some interesting statements in particular with respect to the qualification as an equity-, mixed- or real estate fund, the definition of the term “distribution” and the questions which documents would qualify as statutes (Anlagebedingungen) of the investment fund.
Qualification as an equity or mixed fund
Qualification as a real estate fund
As already stipulated by the GITA 2004, the term „distribution“ not only comprises the amounts actually paid out or credited to the investor, but also the German withholding taxes plus solidarity surcharge thereon as well as non-German withholding taxes levied upon the distribution.
In particular for non-German investment funds, it should be helpful that also contractual agreements such as side letters are recognized as statutes of the fund. The sales prospectus, the annual report or similar documents are not acknowledged as statutes of the fund since they do not govern the contractual relationship between the investment fund and its investors. Only if the statutes rule that the investment policy is laid down in the sales prospectus, the latter document can also qualify as statute.
The competent tax authority is entitled to carry out tax audits. The circular points out that the tax audit can cover all issues that are relevant for the taxation of the investment fund and the investors. Inter alia, this encompasses the audit of the following:
The competent tax authorities may take action by ways of a desk- or a field audit. Field audits can only be carried out in Germany, a tax audit in other jurisdictions is only allowed within the scope of the EU-Directive as regards administrative cooperation in the field of taxation.
Compared to the current law, the GITA 2018 brings a significant extension of the authority to perform a tax audit. Thus, the verification as well as the documentation of compliance with the multifaceted requirements become much more important.
In terms of income that is subject to the partial corporate income tax at investment fund level, the circular states that the different sub-funds of an umbrella construction are to be treated separately resulting in the fact that an offsetting of losses would not be possible in contrast to the share classes of an investment fund.
In addition, the following statements can be found in the circular which are important from a practical point of view:
In relation to the deduction of German withholding tax on income received by an investment fund, the circular states the following:
With respect to possible trade tax at investment fund level, the following important statements are included in the circular:
In case the statutes of the investment fund do not contain the necessary information in order to apply the partial tax exemption rates already when German withholding tax is deducted, the investor can prove in the course of his personal tax assessment that the investment fund has actually exceeded the relevant thresholds throughout the entire fiscal year. According to the circular, this option is – based on the wording of the law – limited to the tax assessment. In other words, it cannot be applied towards the institution which is obligated to deduct German withhold tax.
The proof can be delivered via asset portfolios and / or a written confirmation of the investment fund whereby semi-annual or annual reports do not suffice given that they only reflect an effective date.
The circular contains comprehensive statements regarding application and transitional provisions with some repetitions of the wording of the law and the official reasoning. The following aspects are relevant from a practical point of view:
On July 26, 2016, the German Investment Tax Reform Act was published in the German Federal Law Gazette. As a result, the new German Investment Tax Act (“GITA 2018”) will come into effect on January 1, 2018 with significant changes to the taxation of income received through an (special) investment fund.
For investment funds, the principle of tax transparency will be replaced by an opaque taxation system and consequently a German tax reporting towards the investors (annual tax reporting for distribution and/or deemed distribution as well as daily tax reporting) will not be necessary any longer. Only for special investment funds, the tax transparency regime continues to apply with however wide-ranging modifications.
Due to the new taxation rules and particularly taking into account that investment funds on the one hand and special investment funds on the other hand will be subject to completely different taxation principles, German institutional investors will re-evaluate their positions in investment funds. While institutional investors currently rank among the top investors in investment funds, there will be a shift towards special investment funds in the future. As a consequence, asset managers will have to verify their range of products and to decide from a strategic point of view to establish special investment funds targeting the German market.
The scope of application of the GITA 2018 has been substantially extended, i.e. any investment scheme regardless of whether it is a UCITS or an AIF in the sense of the AIFMD as well as its German investors will be subject to the new taxation rules. Notably, the GITA 2018 goes even beyond of the investment regulatory law and covers so-called fictitious investment funds which are investment schemes lacking certain criteria under the AIFMD (e.g. investment schemes having only one investors).
Certain exceptions of the AIFMD apply for GITA 2018 purposes mutatis mutandis, for example certain securitisation vehicles. Furthermore, investment schemes in the legal form of a partnership do not qualify as investment funds under the GITA 2018 unless they are UCITS or pension schemed investment funds. In this context, separate properties (Sondervermoegen) and comparable non-German legal forms are not considered as partnerships.
In order to qualify as a special investment fund, the following requirements must be fulfilled cumulative:
The core element of the GITA 2018 is the abolition of the tax transparency regime for investment funds and the introduction of an opaque taxation system with two levels of taxation: (i) taxation at investment fund level and (ii) taxation at the level of the investor. Depending on the income received by the investment fund, a German as well as a non-German investment fund is partially subject to German corporate tax. The catalogue of in-scope income, i.e. of income subject to German corporate tax has been defined based on international taxation principles. As a result, particularly German sourced dividend and rental income as well as capital gains from the sale of German property are subject to German corporate tax.
In order to benefit from a reduced withholding tax rate of 15% instead of 25%, the German or non-German investment fund needs to apply for a so-called status certificate at the competent fiscal authority and to file it with the last German entity paying out the income to the investment fund. In the case of income not subject to German withholding tax, the German or non-German investment fund is obligated to prepare and to file a corporate income tax return on an annual basis.
A (partial or complete) exemption of the investment fund from German corporate tax is only possible if certain types of investors are invested and if certain requirements are fulfilled.
At the level of the investor, (i) any distribution made by the investment fund regardless of the actual composition (e.g. also a return of capital), (ii) a pre-determined tax base (Vorabpauschale) and (iii) the capital gain from the sale of the investment fund units is taxable. A partial tax exemption is possible if the investment fund qualifies as equity, mixed or real estate fund which is the case if the respective investment fund meets certain requirements. In most of the cases, changes to the sales documents will be necessary.
In general, a special investment fund and its investors are taxed in the same way as an investment fund and its investors. Unlike the investment fund, the special investment fund can however opt for tax transparency. In this case, the current taxation system (i.e. principle of tax transparency) will continue to apply with however substantial modifications particularly concerning the determination of the income attributed to the German investors.
The investor will be taxed on distributed and/or deemed distributed income as well as on capital gains from the sale of the special investment fund units. However, under the new German Investment Tax Act it is no longer permitted to operate income equalisation for tax purposes. Instead, the taxable income must be attributed to the investor on a pro-rata temporis basis. This means that the special investment fund needs to track (i) which investor (ii) was invested (iii) to which extend (iv) during a certain period of time and (v) which amount and (vi) which type of income has been generated during this time. Furthermore, any income and capital gains which are not part of the deemed distributed income are deemed to be distributed to the investor with the expiration of the fifteenths fiscal year following the collection.
The calculation and publication of the German daily tax reporting figures (equity gain and double tax treaty gain) is still required. In addition, a new daily tax reporting figure for the partial tax exemption on income deriving from underlying investment funds is introduced (partial tax exemption gain).
In a nutshell, the degree of complexity regarding the determination of the income for special investment funds will increase significantly. The implementation of a new computational logic in IT systems is therefore indispensable.
Deloitte has observed the developments right from the beginning and is best placed to provide excellent support in order for market players to be compliant with the new requirements and thus to secure and to expand the market share in Germany.
We are more than happy to answer any questions and to discuss further steps on how to prepare yourself for the upcoming reform.
Marcus Roth
Partner
