GERMANY Law and Practice Contributed by: Amos Veith, Jens Steinmüller, Ronald Buge and Stephan Schade, POELLATH
any other trading income attributable to such German permanent establishment is subject to German tax at the level of such corporate- type fund. Investor level Non-resident corporate investors Distributions by corporate-type German or non- German funds to non-resident investors are not subject to (withholding) tax in Germany. Resident corporate investors Resident investors are subject to German tax on the following three items of income derived from a corporate-type fund: • all distributions; • a lump-sum advance amount that represents a minimum yield and is only subject to tax if the corporate-type fund does not make distri - butions equal to, or exceeding, the lump-sum advance amount; and • capital gains realised upon the sale of shares of the corporate-type fund either in a sec - ondary transaction with a third party or in connection with a redemption of shares or a share buy-back by the corporate-type fund. These three items of income subject to tax at the level of resident investors are eligible for a partial tax exemption in order to mitigate double taxa - tion at fund and investor level if the corporate- type fund qualifies as a so-called equity fund or mixed fund. An equity fund is a corporate-type fund whose binding investment guidelines pro - vide that more than 50% of the total net assets is directly invested throughout the entire fiscal year in equity instruments issued by companies being subject to minimum taxation requirements. For a mixed fund, the relevant threshold for direct equity investments is at least 25%.
For equity funds, the partial tax exemptions for taxable resident corporate investors (other than life or healthcare insurance companies) amount to 80% for corporate income tax purposes and 40% for trade tax purposes. In respect of mixed funds, the partial tax exemptions amount to half of the exemptions applicable to equity funds. Germany’s Tax Treaty Network and Its Impact on the Funds Industry Germany’s tax treaty network is extensive and covers, among others, all member states of the EU and the OECD. German tax treaties gener - ally follow the OECD Model Convention. Ger - man corporate-type funds should be eligible for protection by German tax treaties regardless of the fact that their tax bases only include certain items of German-source income. Because distri - butions by German corporate-type funds to non- resident investors are not taxable in Germany under German domestic tax law, non-resident investors need not rely on treaty benefits in this regard. Funds organised as partnerships are transparent for income tax purposes. German investors ben - efit from Germany’s tax treaty network because the geographic focus of funds typically relates to tax treaty countries. Funds investing in Ger - many benefit from Germany’s tax treaty network because their fundraising very often relates to investors resident in tax treaty countries. How - ever, virtually none of the German tax treaties provides any benefits for non-resident investors in case of income from trade or business that is attributable to a German permanent estab - lishment. In case of trading treatment of a fund partnership from a German perspective this may give rise to mismatches in case the tax authori - ties of the country of residence of a non-resident investor take a contrary view.
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