Investment Tax Reform: Tips for Investors

New: Taxa­tion at the Fund Level – Par­tial Exemp­ti­ons at the Inves­tor Level

Cer­tain domestic income of domestic and for­eign mutual funds will now be sub­ject to cor­po­rate income tax at a rate of 15% or 15.825%. As a lump-sum com­pen­sa­tion for the new tax bur­den at the fund level, par­tial exemp­ti­ons are available depen­ding on the type of inves­tor and focus of the invest­ment. These par­tial exemp­ti­ons are available for all income of the invest­ment fund, i.e., for dis­tri­bu­ti­ons, advance deduc­ti­ons and gains on sale.

© Fotolia

Amo­unt of the par­tial exemp­ti­ons:

There can be tax advan­ta­ges or disad­van­ta­ges depen­ding on the type and com­po­si­tion of the income.

Here is an Example:

A pri­vate inves­tor owns sha­res of an invest­ment fund. The fund gene­ra­tes €100 of domestic divi­dends, €100 of inte­rest income and €100 of gains from the sale of domestic sha­res, and fully dis­tri­bu­tes its income.

Pri­vate inve­s­tors can bene­fit from a tax stand­po­int when they invest in invest­ment funds that meet the requi­re­ments for par­tial exemp­ti­ons. Thus, for example, Exchange Tra­ded Funds (ETFs) are offe­red as phy­si­cally rep­li­ca­ting and syn­thetic ETFs. While phy­si­cally rep­li­ca­ted ETFs invest in sha­res and are thus qua­li­fied as equity funds, syn­thetic index funds rep­li­cate the index via deri­va­ti­ves and in some cases have no or a very small mini­mum invest­ment in sha­res. From a tax stand­po­int it is bet­ter to invest in phy­si­cal ETFs.

What about Cor­po­rate Inve­s­tors?

This app­lies ana­lo­gously to cor­po­rate inve­s­tors. But other par­tial exemp­tion rates apply here and only half of them apply to trade tax, so that we would get the fol­lo­wing num­bers in our example, depen­ding on the legal form:

For cor­po­rate inve­s­tors it is also worthwhile to exa­mine whe­ther invest­ment funds meet the pre­re­qui­si­tes for the par­tial exemp­ti­ons. And to the extent that it has stood up to the cur­rent com­p­li­ca­ted taxa­tion sys­tem with a num­ber of tax ratios and bases of assess­ment for an invest­ment in invest­ment funds, the con­s­i­de­ra­ble sim­p­li­fi­ca­tion through the new taxa­tion rules could pro­vide an addi­tio­nal incen­tive for a medium-sized invest­ment.

Tran­si­tion to the New Rules

The new rules go into effect on January 1, 2018. A sale and purchase fic­tion is pro­vi­ded for the tran­si­tion to the new rules at the inves­tor level. Under this fic­tion, exis­ting sha­res in the invest­ment fund will be dee­med sold at the last red­emp­tion price on Decem­ber 31, 2017 and then dee­med to be reac­qui­red on January 1, 2018. If this results in a taxable gain, the gain will not be taxed until the inves­tor actually sells the inves­tor's sha­res.

Exemp­tion for Invest­ment Fund Sha­res Acqui­red before January 1, 2009

The sale and acqui­si­tion of the exis­ting invest­ment fund sha­res is of parti­cu­lar sig­ni­fi­cance for pri­vate inve­s­tors who acqui­red their invest­ment fund sha­res before January 1, 2009. Until now these inve­s­tors could sell their sha­res tax-free and thus take advan­tage of price inc­rea­ses tax-free wit­hout any time limit. Now, alt­hough price inc­rea­ses up to Decem­ber 31, 2017 will remain tax free, any gains obtai­ned after January 1, 2018 will be taxable under the new rules. For grandfa­the­ring rea­sons a per­so­nal allo­wance of €100,000 is gran­ted. Because the exemp­tion only app­lies to these old sha­res, inve­s­tors should take advan­tage of this "tax gift" and not dis­pose of the old sha­res has­tily. For inve­s­tors who have a high volume of old sha­res, gifts of invest­ment sha­res to spou­ses or child­ren before Decem­ber 31, 2017, should be con­s­i­de­red in order to take advan­tage of the exemp­ti­ons more than once.