GERMANY Law and Practice Contributed by: Amos Veith, Jens Steinmüller, Ronald Buge and Stephan Schade, POELLATH
lar to the taxation of income from non-trading funds. However, corporate investors of a domes - tic trading fund partnership benefit from a trade tax deduction as the fund partnership pays trade tax itself. This does not apply to life and health - care insurance companies which have other mechanisms to avoid double trade tax burden, though. Non-resident corporate investors Generally, non-resident corporate investors of a domestic trading fund partnership are subject to the same tax consequences as resident corpo - rate investors and they must file a German tax return. In particular, German withholding tax can be credited against the German tax liability of a non-resident investor and an exceeding amount (if any) will be refunded upon tax assessment. Non-German funds Regardless of the qualification of their invest - ment activities, non-German funds are typically deemed to be trading from a German tax per - spective due to their legal structure. Resident corporate investors The allocable share of a non-German (deemed) trading fund’s taxable profits is subject to Ger - man tax. 95% of equity capital gains is exempt from corporate income tax and 100% is exempt from trade tax. These exemptions do not apply to life and healthcare insurance companies. The full amount of interest and dividends is subject to corporate income tax, but trade tax is levied only on interest and on dividends where the fund holds less than 10% of the company paying the dividend. Non-resident corporate investors The deemed trading status of non-German funds does not affect their taxation in Germany. Their allocable share of German equity capital gains
is exempt from German tax. However, they may be required to file a German tax return where they have held 1% or more of the share capital of the German company, the shares of which were sold or disposed of (determined on a look- through basis) during the last five years prior to such sale or disposition. They are only subject to tax in Germany in respect of items of income derived from German sources that are subject to German withholding tax at a rate of approxi - mately 26.4% – ie, German dividends and pay - ments on certain profit-linked debt instruments by German issuers. Tax treaty-protected inves - tors may apply to the German federal tax office for a refund under an applicable tax treaty. Corporate-Type Funds The taxation of corporate-type funds (including funds of a contractual type such as the German Sondervermögen and non-German fund vehi- cles that resemble a German Sondervermögen , including trusts) and their investors is governed by the German Investment Tax Act. Fund level A corporate-type fund is a taxpayer in and of itself. Regardless of whether its place of busi - ness management is located in or outside Ger - many, only certain items of German-source income are subject to tax at the level of the fund. • German-source dividends. • Income derived from German real estate (not dealt with herein). • Trading income attributable to a German permanent establishment, but excluding capital gains realised upon the sale of shares of companies. However, if such shares form part of a trade or business and are attribut - able to a German permanent establishment, the full amount of capital gains from the sale of such shares by a corporate-type fund and
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