The German government has incurred the wrath of foreign fund managers furious at proposed tax reform measures, which they believe discriminate against the fund industry in general in Germany and foreign funds.
A coalition of foreign fund managers argues that capital gains tax changes could entirely kill the market for foreign funds in German and threaten Frankfurt's position as a leading financial centre. The proposals would introduce capital gains tax at both fund and investor level with foreign funds being subject to twice as much tax.
The foreign fund managers, backed by organizations including the Fédération Européenne des Fonds et Sociétés d'Investissement (FEFSI), are campaigning the German government and the European Commission against the measures claiming that they are both unfair and contrary to the development of the single market for investment services.
"This discriminates against any foreign funds to such a degree that I think a German investor simply wouldn't invest in foreign funds," said Steen Steincke, the head of global bank assurance at Gartmore Investment Management. "Governments are supposed to encourage investors to spread the risk but in Germany they will have to increase it by investing in equities directly rather than spreading it through funds."
Though individual investors investing directly in equities would be liable to capital gains tax at a flat 15% rate on only 50% of the gains, this flat rate would not apply for funds. All distributions from the sale of equities by foreign investment funds would be subject to tax at the individual income tax rate (a maximum of 48%) while only half of the gains from the distributions would be taxable (at the individual rate) for domestic funds.
When investors sell their holding in a foreign fund the full gain will be subject to a 15% capital gains tax whereas only 50% of the gain from the redemption of a domestic fund will be taxable. And there is further discrimination for foreign funds as while the law allows a tax deduction for the accumulated and already taxed gains when calculating the gain achieved with the redemption, it is unclear that this will be possible for foreign funds.
Fund managers fear that the German government's assurances that it will act to remove the unequal treatment of foreign and domestic funds in 2004 will not be enough as just one year of the additional burden could be enough to make foreign funds impossible to sell.
Sheila Nicoll, the deputy chief executive of the IMA said: "Although the German government has undertaken to review the discriminatory measures in 2004, this will be too late. Just one year of this discriminatory regime would have a seriously detrimental effect on businesses which now operate in Germany."
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