Pursuant to the new German investment tax act (GITA) that will take effect of 1 January 2018, domestic and foreign resident investment funds may become subject to German corporate income tax with various German source income (particularly dividend income from German shares and income from German-situs real estate). The German Federal Central Tax Office (Bundeszentralamt für Steuern) recently published the necessary forms, guidance1 and a Q&A catalogue2 on how to register as an investment fund for tax purposes and receive the beneficial fund status certificate leading to a reduction of German withholding tax already on the fund level. Additionally, certain types of funds (depending on their asset allocation) may qualify for a privileged tax treatment on the level of their German taxable investors.
What entities need a German fund status certificate?
The new German tax liability applies to investment funds (German and non-German UCITS and AIFs, including PE funds and real estate funds) receiving, inter alia, German source income that is subject to German withholding tax. However, if an AIF is structured as a partnership company, such a vehicle generally would not be regarded as an investment fund for German tax purposes, and thus need not apply for a German fund status certificate. Furthermore, specific investment vehicles that are structured similar to AIFs are regarded as investment funds for German tax purposes.
Dividend payments from shares issued by German resident corporations, and income from some hybrid instruments issued by German debtors (e.g., profit participation notes and convertible notes), are subject to German withholding tax. Furthermore, interest on loans that are collateralized with German-situs real estate may be subject to German withholding tax, subject to further requirements being met. Investment funds that receive such income should consider applying for a German fund status certificate, unless the investments are held via a corporate investment vehicle which is then subject to regular German corporate income tax.
Several sub-funds organized under a uniform umbrella are treated as separate investment funds for German tax purposes. Therefore, any sub-fund needs to apply for its own fund status certificate if it expects to receive income that is subject to German withholding tax. A fund status certificate issued for an investment fund applies to all share classes of the fund so that no separate certificates are required for each single share class.
What benefits are provided by a fund tax certificate?
The generally applicable German withholding tax rate is 25% plus 5.5% solidarity surcharge thereon – in total 26.375%. If the investment fund can present a fund status certificate issued by the competent tax authorities, only 15% withholding tax (including solidarity surcharge) will be levied by the dividend paying agent. Therefore, the presentation of a fund tax certificate avoids the necessity of conducting expensive withholding tax refund procedures.
A fund status certificate is not necessary for investment funds that do not receive any German source income subject to German withholding tax (e.g., income from German-situs real estate and from regular bonds issued by German resident debtors).
Which German tax authority is responsible for the issue of fund status certificates?
The fund status certificates must be issued by the competent German tax authority. For German resident investment funds, the location of the central management of the legal representative of the fund determines which local tax authority is responsible. For non-German resident investment funds, the issue of the fund status certificate must be requested from the German Federal Central Tax Office (Bundeszentralamt für Steuern). However, if a non-German investment fund is also invested in German-situs real estate, local tax authorities are responsible for the issuance of the fund status certificate, as determined by where the most valuable German real estate asset is located.
What steps need to be taken?
The managers of investment funds shall determine whether the respective investment fund is invested into German shares or may receive any other German source income that is subject to German withholding tax. If so, a fund status certificate should be applied for to avoid unjustified withholdings on dividend or interest payments.
To receive a fund status certificate from the competent tax authorities, the manager of the investment fund must fill out the relevant form for the investment fund (and each separate sub-fund) and submit the signed form together with the requested attachments to the competent tax authorities. The certificate may be issued by the tax authorities with up to six months retroactive effect (since the application has been submitted to the competent tax authorities).
A valid fund status certificate shall be submitted to the dividend paying agent (typically the custodian bank of the fund) so that the reduced 15% withholding tax rate applies. If taxes on dividend or interest payments have been withheld prior to the submission of the fund status certificate, the tax actually withheld in excess of the amount due for investment funds may be refunded by the dividend paying agent within a period of 18 months after the dividends or interest payments became due. In other cases, the manager of the investment fund may claim for a withholding tax refund with the German Federal Central Tax Office.
Additionally, any domestic or foreign fund with a (direct or indirect) German investor base – even in cases where no German sourced income is generated at all - should assess, if the respective criteria and thresholds for a qualification as either
1) equity fund (“Aktienfonds”) = at least 51% of certain equity investments or
2) mixed fund (“Mischfonds”) = at least 25% of certain equity investments or
3) real estate fund (“Immobilienfonds”) = at least 51% of certain real estate investments
may be complied with on the portfolio level of the fund on an ongoing basis. In such case any German taxable investor into the fund will benefit from substantial reductions within the newly introduced flat tax regime entering into force under GITA from 2018 onwards.
Specific exemptions from the new German tax liability of investment funds may be applicable if some tax exempt investors are invested in an investment fund. With regard to foreign resident investors, a special exemption certification must be requested from the German Federal Central Tax Office.3
Furthermore, domestic or foreign investment funds that fulfil the requirements of specialized investment funds pursuant to the new German investment tax legislation may avoid any taxation of German source income at the fund level. The relevant requirements in this regard must be established before 1 January 2018, and a specific tax filing procedure applies in this case.4