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.