Nexia Ebner Stolz

Investment Tax Reform: Tips for Investors

With interest rates at historic lows, investment funds are a popular investment. But beginning January 1, 2018, new tax rules will apply. Investors can profit by planning for the new rules now.

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.

Investment Tax Reform: Tips for Investors© Fotolia

Amo­unt of the par­tial exemp­ti­ons:

Fund typeMinimum investment according to investment terms of the fundPrivate assetsBusiness assets EStGBusiness assets KStG
Equity fundat least 51% in equity investments30%60%80%
Mixed fundat least 25% in equity investments15%30%40%
Real estate fundat least 51% in real estate and real estate companies60%60%60%
Foreign real estate fundat least 51% in foreign real estate and foreign real estate companies80%80%80%

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.

Tax burden private investor (not including church tax)Current taxationInvestment fund without partial exemptionMixed fundEquity fund
Investment fund income300.00300.00300.00300.00
Tax burden at fund level0.0015.0015.0015.00
Accrual to the investor300.00285.00285.00285.00
Taxable to the investor300.00285.00242.25199.50
Investor tax burden79.1375.1763.8952.62
Total tax burden79.1390.1778.8967.62

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:

Corporate Investor Sole proprietorship / Partnership under Personal Income Tax Act Current taxationInvestment fund without partial exemptionMixed fundEquity fund
Taxable under Trade Tax Act260.00285.00242.25199.50
Tax burden under Trade Tax Act36.4039.9033.9227.93
Taxable under Personal Income Tax Act220.00285.00199.50114.00
Tax burden investor67.9695.3160.7226.13
Total tax burden104.36150.21109.6469.06
Corporate Investor Company under Corporate Income Tax Act Current taxationInvestment fund without partial exemptionMixed fundEquity fund
Taxable under Trade Tax Act205.00285.00228.00171.00
Tax burden under Trade Tax Act28.7039.9031.9223.94
Taxable under Corporate Income Tax Act205.00285.00171.0057.00
Tax burden investor32.4445.1027.069.02
Total tax burden61.14100.0073.9847.96

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.

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