GERMANY Law and Practice Contributed by: Tarek Mardini, Antonia Puglisi and Enzo Biagi, POELLATH
Tax Act do not apply. In return, investment fund pro - ceeds (ie, distributions, predetermined tax bases and capital gains from dispositions or redemptions) are now subject to partial exemptions depending on the respective fund type. Partial exemptions in respect of certain types of funds With respect to “equity funds”, the partial exemption is: • 30% of such proceeds for individuals who hold their investment fund interests as part of their non- business assets; • 60% for individuals who hold their investment fund interests as part of their business assets; and • 80% for corporate investors. With respect to mixed funds, half of the partial exemp - tion rate applicable to equity funds is available to investors. With respect to real estate funds, the partial exemption is 60% or 80% of the proceeds, depend - ing on whether the fund invests at least 51% of its value in German or non-German real estate and real estate companies. In return, income-related expenses and operating expenses may not be deducted to the extent of the available partial exemption percentage. With regard to trade tax at investor level, half of the applicable partial exemption rate applies. Non-resident investors Domestic and foreign investors in investment funds are treated equally on a formal basis. However, the partial exemption rates provided in the German Invest - ment Tax Act only benefit German investors, because foreign investors are generally not subject to any tax obligation in Germany at the level of investment fund investor. In the case of non-resident investors of a German investment fund subject to the German Investment Tax Act, the distributions to such non-resident inves - tor will not be taxable in Germany and will not be sub - ject to withholding tax. As a result, non-resident inves - tors who make German investments via (domestic or foreign) investment funds only have to bear a German tax burden, as far as there is taxation at fund level (fund input side). The German non-taxation of distri -
butions to non-resident investors (fund output side) is completely independent of which assets the fund holds, in which country the investor is domiciled and whether a double taxation agreement is applicable. Specialised investment funds: “restricted transparency” regime (optional) If the investment fund qualifies as a specialised invest - ment fund, the fund may opt to be treated transpar - ently for tax purposes. As a result, the fund itself will not be subject to taxation, that is, it will effectively be transparent (although not as fully transparent as a partnership). This “restricted transparency option” regime is similar to the tax regime for investment funds under the German Investment Tax Act which was in force before 2018, but with certain amendments. Specialised investment funds may only have a maxi - mum of 100 investors. Unlike the prior law (in force before 2018), there is a “look-through approach” with respect to partnerships as investors (ie, each partner of such partnership is counted as one investor of the fund). However, individuals may now invest directly in a specialised investment fund, provided that they hold such fund interests as part of their business assets (previously, only the indirect participation of investors was possible). To qualify as a specialised investment fund, a fund must satisfy certain criteria with respect to regula - tion, redemption rights, eligible assets and investment restrictions. These are substantially similar to the cri - teria under the law in place before 2018 (although cer - tain changes with respect to the definition of “securi - ties” apply). If the specialised investment fund opts to apply the restricted transparency regime, at fund level, there is no taxation for domestic participation income and domestic real estate income. At the investor level, “special investment income” is subject to tax (ie, distributed income, deemed distributed income and capital gains realised upon the disposition or redemp - tion of fund interests). The flat income tax rate is not applicable, even if an individual holds its investment fund interests as part of its non-business assets. For - eign withholding tax is still creditable.
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