The taxation of a Luxembourg FCP with German source income and/or investors liable to tax in Germany has long been controversial. Is the FCP an independent taxable entity or is it transparent for tax purposes so that the investors are taxed? The Münster Fiscal Court (judgement of 20 April 2017, 10 K 3056/14 K) has published the first important judgement on this question, which differentiates in particular according to whether the FCP is a closed-end fund or whether the investors can return their fund units to the management company.
The main statements of the court can be summarised as follows:
- The closed-ended FCP (without a right of redemption for investors) is to be qualified as a non-transparent taxable entity subject to corporation tax on its German income. It must fulfil its own tax obligations independently of the investors and, for example, declare and pay tax on German real estate income.
- Unlike German investment funds, the FCP is not tax-exempt in Germany. In the opinion of the Münster tax court, this unequal treatment does not violate EU law.
The case law only affects closed-ended FCPs that were launched before the introduction of the AIFM Tax Adjustment Act (as at 24 December 2013). Funds set up after this date are qualified as (non-transparent for tax purposes) taxable entities by law anyway.
For open-ended FCPs with a redemption right for investors, it can be deduced from case law that such funds are transparent for tax purposes and are therefore not themselves taxable on German income. In these cases, the investors must be looked through. Corresponding tax assessments should be kept open.
From 2018, this case law will no longer be relevant, as all funds will be treated as corporate income taxpayers on their domestic income on the basis of the Investment Tax Reform Act.
An analysis of this judgement with a detailed description of the practical implications can be found at FundTrends.
