Fund products are traditionally an integral part of a diversified investment as part of asset management by private banks. At the same time, investment funds have so far also been of interest to investors who make investment decisions themselves or in consultation with their client advisors in private banking. Depending on their investment horizon, risk appetite and preferred asset classes or currency and regional preferences, the variety of investment funds on offer means that private investors can easily realise their individual investment decisions without having to think too much about individual securities or when to buy and sell.
However, the idea of collective investment is also an important component of an economy. Professional fund managers ensure an efficient allocation of capital by using the assets they manage to exert considerably more influence on the management of the target companies than would be possible, for example, through individual shareholder representatives. This means that the entire capital market benefits from collective investment via investment funds. Funds also play a key role in pension schemes.
Compared to direct investments, mutual funds have so far had some Tax benefitsin particular because certain income components do not qualify as income equivalent to distributions and are therefore not taxable at investor level if reinvested. On the other hand, the punitive taxation of non-transparent funds could also result in significant Tax disadvantages if no data could be obtained for an exonerating comparative calculation of the actual returns. In practice, non-transparent investment funds were therefore less attractive and the investment universe was therefore unnecessarily restricted. The European Court of Justice therefore also found a violation of the free movement of capital (cf. on practice Elser/ ThiedeBMF opens up the possibility of correcting the punitive taxation of fund investments, in: NWB Inheritance and Assets 2015, p. 104).
Once again, the legislator was called upon to transpose these requirements into national law. With the Investment Tax Reform Act of 19 July 2016, the taxation of mutual funds was to be brought into line with European law and at the same time greatly simplified (see in detail: Elser/ Thiede, Das Investmentsteuerreformgesetz - Auswirkungen auf private Kapitalanleger, in: NWB Inheritance and Assets 2016, p. 299).
Private banking faces several challenges at the same time:
- Which fund products will (still) be attractive for tax purposes in the future?
- How will the new taxation regime affect new products?
- What are the implications for reporting?
Customers also have further questions: Will shares also be affected by the cancellation of grandfathering in the future? Should I realise my shares early? Are there any implications for inheritance and gift tax? This is just a small selection from a large number of conversations with client advisors and clients, but once again shows the need for action and information on this complex area of tax law. After all, a completely different taxation system will apply from 2018 because the funds themselves will in future be subject to limited German corporation tax on their domestic income, regardless of where they are domiciled. This will be accompanied by additional taxation of the shareholder, with the impact of the tax burden depending on the following information:
- Qualification of the fund (equity, mixed property or other fund)
- Amount of distributions
- Fund unit value at the beginning of the year
- Fund unit value at the end of the year
Looking at these key figures alone, the new fund taxation does indeed appear to be accompanied by a major simplification. Extensive data collection, which is hardly comprehensible for investors and asset managers - income equivalent to distributions, interim profits, etc. - will no longer apply to mutual funds in future.
This will have a drastic impact on traditional fund reporting in accordance with Section 5 InvStG, which is still in force. Fund providers and banks, together with their data suppliers, must think about a changeover on 1 January 2018 in good time. A transition period is not planned. There will probably be more short tax years, which may also be implemented under investment law. The previous grandfathering for old fund units will also be abolished; unrealised increases in value accrued up to 31 December 2017 will not be subject to tax. These changes alone give rise to numerous detailed questions regarding future fund reporting. At the same time, the fund-specific partial exemptions for the deduction of capital gains tax will result in extensive tax burden effects for the fund unit holder. For private banking advisors, this means that fund investments that were previously disadvantageous from a tax perspective may be attractive in future - this applies to the entire spectrum of fund vehicles that were previously classified as non-transparent. Conversely, certain funds will no longer be tax-efficient in future or will lose certain privileges (mixed funds; property funds with German properties). While the recognition of distribution-equivalent income for current dividend and interest income in the case of accumulating funds has so far ensured that tax is passed through and is also associated with increased declaratory effort, particularly in the case of foreign funds, the moderate advance lump sum will soon shift the advantage in favour of accumulating funds.
The WM seminar offers an in-depth insight into the changed framework conditions for fund reporting and with regard to tax-optimised product design "Tax-efficient fund products and tax reporting under the new investment tax law" 27 September 2016 in Frankfurt am Main.
Dr Frank Thiede is a tax consultant at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.
