The German Federal States on 29 November 2013 approved the bill for the adjustment of the German Investment Tax Act (see also DechertOnPoint: German Investment Tax Act for Alternative Investment Funds) as adopted by the German Parliament (Bundestag) on 28 November 2013. The amended Investment Tax Act, which contains special tax regimes for investment in German and foreign funds, will therefore enter into force upon publication of the bill in the German Federal Law Gazette (Bundesgesetzblatt). Publication is expected to occur shortly, likely before year’s end.
Different tax regimes: investment funds vs. investment entities
The amended Investment Tax Act introduces two new tax regimes for alternative investment funds (AIFs), subject to certain grandfathering provisions, distinguishing between:
investment partnerships; and
investment companies (together “investment entities”).
By contrast, UCITS and similar open-end AIF investment funds will generally still be treated as so-called “investment funds” under the new tax regime and will be fully tax transparent if certain reporting and publication requirements are adhered to.
Taxation of investment entities (Investitionsgesellschaften)
Investment partnerships (Personen-Investitionsgesellschaften) will, for income and corporate tax purposes, be treated as tax transparent. German investment partnerships, however, will be separate taxpayers for trade tax purposes provided they carry out, or are deemed to be carrying out, a business. German and foreign investment partnerships need to prepare and file partnership tax returns if there is at least one German tax resident investor.
Investment companies (Kapital-Investitionsgesellschaften) that include German and non-German AIFs that are either legally structured as a company (e.g., a German InvestmentAG or a Luxembourg SICAV S.A.), or in a contractual format (e.g., a German Sondervermögen or a Luxembourg FCP), will be treated as separate taxable entities for tax purposes. Consequently, German investment companies are subject to corporate income and trade tax, whereas foreign investment companies will be taxed on German source income only. German investors in investment companies will only be taxed upon any distributions and capital gains; the participation exemption for such earnings will no longer be available in case the investment companies are tax exempt. It is noteworthy that the penalty taxation rule regarding non-distributing investment companies that had previously been discussed has finally not been introduced.
For German AIFMs making use of the cross-border management passport by managing non German AIFs, the Investment Tax Act does not provide for specific rules. This may give raise to German tax issues in such context.
Other amendments and potentially upcoming reform
The amended Investment Tax Act also contains provisions to counteract certain tax schemes or to abolish certain tax benefits in relation to fund investments (e.g., bond stripping and deductibility of income-related expenses). Finally, it has also been announced that the Investment Tax Act might be reformed in the future to reduce complexity. Should this occur, a penalty taxation rule regarding non-distributing investment companies might again be considered. When such a reform might be initiated, however, remains to be seen.