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.
© FotoliaAmount of the partial exemptions:
| Fund type | Minimum investment according to investment terms of the fund | Private assets | Business assets EStG | Business assets KStG |
|---|---|---|---|---|
| Equity fund | at least 51% in equity investments | 30% | 60% | 80% |
| Mixed fund | at least 25% in equity investments | 15% | 30% | 40% |
| Real estate fund | at least 51% in real estate and real estate companies | 60% | 60% | 60% |
| Foreign real estate fund | at least 51% in foreign real estate and foreign real estate companies | 80% | 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 taxation | Investment fund without partial exemption | Mixed fund | Equity fund |
|---|---|---|---|---|
| Euro | Euro | Euro | Euro | |
| Investment fund income | 300.00 | 300.00 | 300.00 | 300.00 |
| Tax burden at fund level | 0.00 | 15.00 | 15.00 | 15.00 |
| Accrual to the investor | 300.00 | 285.00 | 285.00 | 285.00 |
| Taxable to the investor | 300.00 | 285.00 | 242.25 | 199.50 |
| Investor tax burden | 79.13 | 75.17 | 63.89 | 52.62 |
| Total tax burden | 79.13 | 90.17 | 78.89 | 67.62 |
| Difference | - | 11.04 | -0.24 | -11.51 |
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 taxation | Investment fund without partial exemption | Mixed fund | Equity fund |
|---|---|---|---|---|
| Euro | Euro | Euro | Euro | |
| Taxable under Trade Tax Act | 260.00 | 285.00 | 242.25 | 199.50 |
| Tax burden under Trade Tax Act | 36.40 | 39.90 | 33.92 | 27.93 |
| Taxable under Personal Income Tax Act | 220.00 | 285.00 | 199.50 | 114.00 |
| Tax burden investor | 67.96 | 95.31 | 60.72 | 26.13 |
| Total tax burden | 104.36 | 150.21 | 109.64 | 69.06 |
| Difference | - | 45.85 | 5.28 | -35.30 |
| Corporate Investor Company under Corporate Income Tax Act | Current taxation | Investment fund without partial exemption | Mixed fund | Equity fund |
|---|---|---|---|---|
| Euro | Euro | Euro | Euro | |
| Taxable under Trade Tax Act | 205.00 | 285.00 | 228.00 | 171.00 |
| Tax burden under Trade Tax Act | 28.70 | 39.90 | 31.92 | 23.94 |
| Taxable under Corporate Income Tax Act | 205.00 | 285.00 | 171.00 | 57.00 |
| Tax burden investor | 32.44 | 45.10 | 27.06 | 9.02 |
| Total tax burden | 61.14 | 100.00 | 73.98 | 47.96 |
| Difference | - | 38.86 | 12.84 | -13.18 |
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.
