Fund establishment costs no immediate expense
Costs to be paid to the project provider or third parties as part of the conception or registration of a fund investment (joint investment based on a pre-formulated contract) (so-called fund establishment costs) are included in the acquisition costs of the assets to be acquired. Such costs are therefore not immediately deductible as operating expenses, but can only be amortised over their useful life. The new legal regulation serves to consolidate the previous administrative opinion, as the Federal Fiscal Court had contradicted this tax administration practice in its recent case law (IV 233/15). The capitalisation requirement also applies to individual investments made by an investor, i.e. outside of a fund structure, provided that this individual investment is made on the basis of a pre-formulated contract (e.g. purchase of an old flat in need of renovation if the property developer also takes over the procurement of financing and subsequent letting).
Avoidance of so-called cum/cum transactions
§ For some years now, Section 36a of the German Income Tax Act (EStG) has regulated the conditions for the crediting of capital gains tax on share purchases around the dividend record date (so-called cum/cum transactions). For certain tax-exempt investors, no capital gains tax is withheld on dividends. If such investors carry out cum/cum transactions, they must pay 15% capital gains tax (Section 36a (4) EStG).
The new provision of Section 36a (4) EStG serves to concretise the taxpayers' notification, declaration and payment obligations in procedural terms.
No tax-reducing consideration of the worthless expiry of options or capital claims
The BFH has ruled (VIII R 13/15) that, following the introduction of the flat-rate withholding tax in 2008, the final loss of an option or a capital claim leads to a tax-recognisable loss from capital assets. The legislation now aims to correct this by classifying the expiry of an option or the irrecoverability of a capital claim or the derecognition of worthless assets as irrelevant for tax purposes. The legislation justifies this by stating that even after the introduction of the flat-rate withholding tax, the (loss of value in the) asset base should continue to be irrelevant for tax purposes. It should be critically noted that the tax recognition of positive changes in value in the asset base should then also not be taxed. It is to be hoped that the legislature will refrain from this "non-application law", which breaks through the highly unfavourable case law, in the course of further legislative procedures.
Trade tax treatment of dividends from third-country transactions
Dividends from shareholdings in foreign corporations received by a corporate investor are exempt from trade tax if a minimum shareholding ratio (10% or 15%) is exceeded. According to the previous legal situation, this tax exemption (so-called trade tax box privilege) for distributions from third-country companies (outside the EU or EEA) was dependent on the fulfilment of additional activity requirements. The ECJ recently rejected this as contrary to European law (see ECJ of 20 September 2018, C-685/16). The legislation now takes this case law into account by deleting the restrictive conditions for the exemption of third-country dividends.
Amendments to the Investment Tax Act
Restrictive definition of equity investments The holding of "equity investments" is of central importance for a fund to qualify as a privileged equity fund (≥ 50% equity investments) or as a mixed fund (≥ 25% equity investments). Only then are attractive partial exemptions applied to distributions from the fund at investor level (up to 80%).
The law stipulates, among other things, that equity interests held only indirectly via partnerships do not qualify for the equity interest ratio. This is particularly disadvantageous for funds of funds that, for example, invest in private equity funds (which typically have the legal form of a partnership and hold shares in target corporations).
Furthermore, shares in certain holding corporations are excluded from qualification as equity investments if more than 10% of the income of this holding company is derived from offshore corporations or other tax-exempt corporations. The background to this regulation is that, as a prerequisite for the application of the partial exemptions at investor level, a sufficient prior tax burden at fund or downstream investment level(s) should be proven.
Taxation of notional capital gains from the transition to InvStG 2018 even if the fund qualification changes As at 31 December 2017, the hidden reserves in the fund units held were determined (so-called notional capital gain Section 56 InvStG) in order to ensure a smooth transition to the new InvSt law. However, the notional capital gain was not to be taxed immediately as at 31 December 2017, but only on the subsequent actual redemption.
The InvStG 2018 contains further notional disposals, in particular if the fund qualification changes in accordance with the new InvStG (see section 19(2) InvStG). The law now stipulates that in such cases of fictitious disposal, the fictitious capital gain is also taxed directly in accordance with section 56(3) InvStG.
Against this background, fund providers should ideally avoid changes to the fund qualification.
Your TAXGATE team will be happy to advise you on further questions, particularly in the area of structuring cross-border investments.
