The reform of the German Investment Tax Act

The current investment tax act foresees a transparent tax system for investment funds.

AT THE END OF JULY 2016, THE GERMAN LEGISLATOR ADOPTED THE REFORM OF THE GERMAN INVESTMENT TAX ACT, WHICH WILL COME INTO EFFECT ON 1 JANUARY 2018.

The determined amendments in the recent law will cause a fundamental systematic change. The current Investment Tax Act foresees a transparent tax system for investment funds. The income at the level of the funds remains tax-free and a taxation merely occurs at the level of the investors.

Forthcoming tax regime

According to the adopted reform investment funds will instead be subject to corporate income tax in the amount of 15% plus 5,5% solidarity surcharge. The tax liability applies uniformly for both domestic and international funds, but only to:

  • Income from domestic holdings and therewith particularly domestic dividends, but not gains from the sale of shares
  • Income from domestic real estate , which includes both current income as well as capital gains
  • Other domestic income that comprises trade income

Interests, gains from futures and the disposal of securities as well as foreign dividends and foreign real estate income will continuously remain tax-free at the level of the funds.
As before, fund dividends and capital gains from the sale of fund shares will be taxed at the level of the investor . Instead of the current deemed distribution income the recent law foresees a so-called pre-determined tax basis.
In order to avoid or rather reduce a double taxation of the same income at the fund level as well as at the investor level, the investment income will be partially exempted at the investor level. The amount of this partial exemption depends on both the fund category (stock, mixed, real estate or other funds) and the type of investor (private individual, business investor or corporation). The exemption ranges from 15% to 80%. No exemption will be granted for investments in other funds.

Next steps

  • The recent law creates a fictive sale of all fund shares on December, 31st 2017 and their subsequent   epurchase on January, 1st 2018. It should be considered whether an actual sale prior to this date would be advantageous
  • The partial tax exemption for the investors requires that the fund category is implemented in the investmentguidelines  of the funds. Therefore, a potential adjustment of the guidelines should be performed before January, 1st2018
  • Foreign investment funds with domestic dividend income or domestic real estate income should ensure that they will be able to meet their declaration obligations in Germany from January, 1st 2018 onwards
  • Comparative calculations show that the adopted reform does not inevitable leave the investors worse off. Indeed, the recent law may be a positive surprise for some investors.

Need for a case-by-case analysis

Customised comparative calculations  would demonstrate the tax implications in each individual case.