German government outlines changes to investment tax

The German government has today presented the draft Investmentsteuergesetz, a new investment tax law to the German parliament.

The law, which aims to harmonise the taxation of domestic and foreign domiciled investment funds, it is set to enter into force as of 2018.

German law has until now distinguished between domestic and foreign domiciled funds, with domestic funds being exempt from a 15% tax on investment returns, a practice, which could be considered discriminatory under EU law.

In future, all funds will have to consider a 15% corporation tax in investment returns, however, retail investors will benefit from a tax free bracket of 30% for equity, 15% for multi-asset, and 60-80% for property funds.

Morever, the new investment tax aims to tackle tax evasion by shifting assets to a new owner in order to avoid taxation on dividend returns, a practice known as dividend stripping. By purchasing the shares just before the dividend is paid and selling them just after, investors aim to avoid paying tax on dividends. The new legislation will require investors to hold a share for at least 45 days in an attempt to crack down on potential tax avoidance.

Thomas Richter, CEO of German investment fund association BVI comments on the proposed legislative changes: “The government proposal points in the right direction. The interplay between charges on inputs on a fund level and the tax free brackets or refunds on the investor levels leads in many cases to appropriate results for the taxation of mutual funds. On the Spezialfonds side, the current legislation will continue. However, looking at the details of the provisions, there remains room for improvement.”

Specifically, Richter criticises the taxation of property property funds, as it represents a disadvantage for retail investments in funds compared to direct investments in property. He also argue against government moves to introduce the taxation on dividend returns from German stocks as of 2016. Instead, he proposed to amend the taxation in 2018, alongside the remainder of new legislation.

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