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2018 German Tax Reform for Investment Funds

6 February 2018

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A new tax law came into effect on 1 January 2018 affecting German domestic and foreign funds holding German investments or being promoted by German asset managers.

There were various reasons for this new law to be put into place: firstly, the old law discriminated against foreign investment funds and it facilitated unwanted tax avoidance. Secondly, it was both too expensive and too complex for an error-free application at (retail) investor level.

While the taxation of foreign resident investors in Germany and in foreign investment funds remains fairly unchanged, for investments in real estate and equity funds, German investors may benefit from a partial tax exemption of income.

Real estate investment funds will become subject to German taxation with rental income and capital gains from German real estate while non-German investment funds are taxed similar to the existing tax regime. In order to qualify for the partial tax exemption for non-German real estate funds the promoter either has to monitor the investment quota in the German real estate assets or change the fund documentation to reflect the quote of at least 51%. Easier than using real estate investment funds would be the structuring of investments in German real estate via tax transparent vehicles such as the Limited and Special Limited Partnerships, the SCS and the SCSp.

The same conclusion can be drawn for private equity funds: the use of tax-transparent partnership structures may be more efficient for German corporate investors (same structures as above).

In terms of VAT, the new exemptions are now limited to the Undertakings for the Collective Investment of Transferable Securities (UCITS), UCITS-like Alternative Investment Funds (AIFs)s and pension schemes, the treatment of the management of real AIFs is still uncertain. This stands in contrast to Luxembourg where the VAT treatment of management of Luxembourg AIFs has been confirmed as exempt.

As of 1 January 2018, all investment funds with German sourced income subject to withholding tax must apply for an “Investment Fund Status Certificate” to reduce withholding tax on fund level already ex-ante. This includes real estate funds.

For all funds wanting to obtain the tax transparent fund status the self-declaration deadline has extended to 30 June 2018.

It needs to be noted that the definition of investment funds under German and Luxembourg  law, for example, are not the same; so each fund needs to be assessed to determine whether it qualifies for partial tax exemption or not. The criteria includes whether German investments are held, whether the fund has German investors and which legal form the fund has chosen. Concerning the latter, limited partnerships are out of scope while S.A., S.àr.l. and S.C.A. are potentially in scope and need to be analysed in more detail to arrive at a conclusion as to the appropriate treatment under the new fund tax law.

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