Germany: Discussion draft issued on reform of investment taxation

Alexander Wenzel		Thomas Vana

A discussion draft for a reform of Germany's Investment Tax Act published by the Ministry of Finance on July 22 2015 contains fundamental and wide-reaching changes to the taxation of income received by German investors through investment funds. The changes would follow the recent changes effective from December 24 2014.

After the release of the discussion draft, a formal legislation procedure might be initiated later in 2015, up until September. If adopted, the new rules would apply as from 1 January 2018.

Under the current tax system, German investors in an investment fund are taxed under the 'tax transparency' principle, that is, profits and income earned by the fund are taxable only in the hands of the investors; the fund is not subject to tax.

The transparent tax system generally would continue to apply to investment funds that do not have more than 100 (non-individual) investors. However, significant changes would be made to the tax treatment of other investment funds and their German investors:

• The scope of application of the Investment Tax Act would be broadened to capture a number of investment vehicles (except, for example, for typical private equity funds);
• Taxation would apply at the fund level regardless of where the fund is tax resident.

Investment funds would be subject to the 15% corporate income tax (including the 5.5% solidarity surcharge) on income that is subject to non-resident taxation in Germany, that is, German dividends (including compensation payments), income from real estate assets located in Germany and other income. A tax exemption would be possible only to the extent eligible persons invest in the fund.

At the level of the German investor, the discussion draft provides for taxation of any (1) distributions; (2) lump sum amounts if distributions and appreciation in fund value do not exceed a threshold based on a deemed interest-free rate of return; and (3) capital gains from the disposal of fund units.

To (partially) compensate for the taxation at the fund level, there would be tax relief at the investor level for equity and real estate funds, although stringent requirements would have to be met.

Alexander Wenzel (alwenzel@deloitte.de) andThomas Vana (tvana@deloitte.de)
Deloitte
Tel: +49 69 75695 6111 and +49 89 29036 8891
Website: www.deloitte.de

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