2018 Investment Tax Reform
In the current low-interest-rate environment, where instant-access savings accounts are just as unprofitable as risk-free fixed-income investments, more and more money is flowing into investments offering higher potential returns – including, amongst others, Investment funds. An investment fund is a company that manages investors’ money as a so-called. Investment fund managed. The fund is typically invested across various asset classes (e.g. shares, bonds, commodities, property).
For tax purposes, income generated by the investment fund from its investments has, until now, generally been attributed directly to the investor. Taxation was therefore carried out as if the investor had invested directly in the fund. With the Investment Tax Reform This direct attribution of income has been replaced by a partial tax liability at the level of the fund company. Investment funds are now subject to tax on their domestic income subject to corporation tax (Section 6 of the Investment Income Tax Act). In this context, income taxed at the level of the investment company is also taxed at the investor’s end. However, the legislator did not wish to impose an additional tax burden. A partial exemption rate was therefore introduced. The extent of this partial exemption depends both on the focus of the asset class (e.g. equity funds, mixed funds, property funds) and on whether the investment units are held as part of private assets, business assets or by corporate entities (Section 20 of the Investment Income Tax Act). Special exemptions apply, amongst other things, to investment units for certain Pension and basic pension schemes (Section 16(2) of the Investment Income Tax Act).
There is a further change affecting accumulation-type investment funds. With such funds, the income is not (entirely) distributed to investors but is reinvested by the fund company. For tax purposes, this so-called „distribution-equivalent income“ was treated as having been received by the investor on a notional basis and was therefore taxable. Particularly in the case of foreign reinvesting investment funds, taxpayers previously had to calculate the distribution-equivalent income – as well as any related tax credits – themselves on a regular basis and declare it in their tax return. This will no longer be necessary in future. Instead, a so-called ‘advance lump sum’ will be calculated and attributed to the investor on the first working day of the new year (i.e. for 2018, as at 2 January 2019, Section 18 of the Investment Income Tax Act (InvStG)). In the event of the subsequent sale of the investment units, the profit must be reduced by the flat-rate amounts recognised during the period of ownership (Section 19(1), third sentence, of the Investment Income Tax Act (InvStG)).
It should also be noted that the grandfathering provision for shares acquired before 1 January 2009 and held as part of private assets has no longer applied since 1 January 2018. As a result, whilst capital gains on existing shares recorded up to the end of 2017 are disregarded when calculating capital gains, any gains realised thereafter are no longer tax-exempt. For many retail investors, however, the rule is unlikely to be relevant, as a personal An allowance of EUR 100,000 applies (Section 56(6) of the Investment Income Tax Act). In order to distinguish between capital gains realised by the end of 2017 and price increases that occurred thereafter, the legislator employs the notional assumption that the investment fund units were sold on 31 December 2017 and repurchased on 1 January 2018 (Section 56(2), first sentence, of the Investment Income Tax Act (InvStG)).
All of this applies essentially to so-called public funds. Such investment funds may be purchased by both private and institutional investors and are therefore available to a broad „public“. The Investment Act (InvStG) contains specific provisions for so-called special funds, which are generally reserved for a limited group of investors (usually institutional investors).
For further information, please contact our Specialist solicitors and tax advisers.