German institutional investors traditionally hold their investments via special funds. Investors are currently receiving mail from the capital management companies that manage their special funds. This includes a request to exercise certain options with regard to the tax treatment of special funds from 2018. This concerns the question of whether to opt for non-transparent mutual fund taxation or special investment fund taxation (with or without exercising the so-called transparency options). These are regularly "Bohemian villages" for investors, which makes it clear that the legislative objective of simplifying investment taxation could not be realised, at least in the area of special funds.

What is at stake? Special funds set up under supervisory law, e.g. as German investment funds under the KAGB, may in future be treated like normal investment funds under the new non-transparent taxation regime for (retail) investment funds, with taxation of certain domestic income at fund level and the granting of Partial exemptions at investor level. In certain constellations, this can result in a significant reduction in the overall tax burden and a considerable improvement compared to direct investment, but requires the assets to be allocated to the fund accordingly (cf. Elser, Corporate Asset Management nach Reform der Investmentbesteuerung, in: CORPORATE FINANCE, Issue 5/2016, p. 141).

Alternatively, if the special fund has numerous Investment limits and other requirements observed, still looking for a separate taxation regime for special investment funds which is based on the investment fund taxation applicable until 2017. However, the devil is in the detail here: Under these regulations, the investor must choose whether to exercise the so-called transparency option. If the transparency option is chosen, there is no tax burden at fund level and all investment income is recognised directly by the investor. If the transparency option is waived, domestic income (dividends, property income) is already taxed at the level of the investment fund; at the level of an investor subject to corporation tax, this already taxed income is then tax-free.

The question of whether or not the transparency option should be exercised in the context of special investment fund taxation depends in particular on the tax status of the (institutional) investor and the composition of the income. For example tax-exempt investors waiving the transparency option is typically not a sensible alternative, as any tax burden at fund level represents a definitive tax burden that is not acceptable from the perspective of the tax-exempt investor compared to a direct investment. The situation may be different for taxable investors (corporates, banks, family offices, etc.). In this case, waiving the transparency option may result in overall tax advantages and administrative simplifications.

Your Investment Tax Team has comprehensively analysed this important decision-making situation for institutional investors and will be happy to provide you with further information at any time.

Contact person:

Dr Thomas Elser Tobias Stiegler Dr Frank Thiede

Further reading:
Elser, Commentary on § 16 InvStG 2018 (investment income), in: Beckmann/Scholtz/Vollmer: Investment Handbook, Erich Schmidt Verlag, Kz 415 § 16.

Event information:
WM seminar in Zurich on 26 October 2017: TAX-EFFICIENT FUND PRODUCTS AND TAX REPORTING UNDER THE NEW INVESTMENT TAX LAW

NWB AKADEMIE in Cologne on 22 November 2017: PRACTICE OF INVESTMENT TAX LAW