Fifteen years ago, a fundamental change in the corporate taxation system was implemented in Germany. The corporation tax imputation system that had applied until then was replaced by a double taxation system. The system change was heavily criticised by academics at the time (see only Siegel / Bareis et al., BB 2000, 1269), as it was accompanied by the abandonment of an important principle for a coherent system of corporate taxation, namely the objective of decision neutrality of taxation. According to this, entrepreneurial activities should ideally be taxed indiscriminately, regardless of the legal form in which they are carried out (corporation, partnership, sole proprietorship). This means that profits should ultimately only be subject to income tax at the level of the entrepreneur, regardless of whether the entrepreneur decides to use a tax-transparent legal form (partnership, sole proprietorship) or a tax-shielding legal form (corporation) for the realisation of their commercial activities. In this view, any tax withheld at the level of a corporation (corporation tax) for reasons of tax collection is merely to be regarded as an advance payment on the shareholder's individual income tax liability. This basic principle formed the basis of the corporation tax imputation procedure, which was in force until 2001 and strongly favoured by academics. The legislator, however, saw the need to abolish this system and replace it with a double taxation system, which is characterised by the fact that a definitive corporation tax (not creditable at shareholder level) is incurred at the level of a corporation and distributions are also taxed at shareholder level, in particular for reasons of European law and due to the supposed complexity of the imputation procedure.
History repeats itself - even in tax law. Before Christmas, the legislator presented the draft for a new investment tax law (see TAXGATE News from 18.12.2015). In investment tax law, too, an important tax system principle is to be completely abandoned from 2018 for almost the same reasons as 15 years ago (administrative complexity, EU law concerns), namely the principle that the tax consequences of fund investments should correspond to those of direct investments. This taxation principle, which has been undisputed in Germany and internationally for decades, is now to be replaced by a non-transparent taxation system, which is characterised by the fact that an independent definitive corporate income tax charge will be incurred on German dividend and real estate income at investment fund level. At the investor level, distributions, gains from the sale of fund units and - in order to counteract deferral advantages - a so-called advance lump sum will also be taxed in order to ensure effective double taxation for mutual funds. Attempts are then made to achieve a certain degree of compensation by means of flat-rate partial exemptions for certain types of funds (equity funds, mixed funds, property funds), although this can only be achieved accurately in a few individual cases. Depending on the type of assets held by the fund, the location of the assets, the tax status of the investor, the qualification of the fund as a "special investment fund", etc., the investor will in future be better or worse off with a fund investment compared to a direct investment. In practice, this will mean that institutional and private investors will no longer be able to simply assume that fund investments are privileged and will increasingly have to make their investment decisions based on tax considerations.
Double taxation systems may be easier to handle from the perspective of the tax authorities. However, this comes at a high price, as tax law is no longer decision-neutral and, depending on the structure of the company or the investment in economically comparable alternatives, results in different overall tax burdens (see the case studies on the new investment fund taxation in Elser/Thiede, Der Referentenentwurf zur Reform der Investmentbesteuerung (InvStRefG), NWB-EV Heft 2/2016, p. 51 ff.). The entrepreneur or investor must engage in tax planning and needs a specialised tax advisor for this in order to be properly informed about the tax consequences of their investment. The taxation system deliberately designed by the legislator to be decision-neutral is of course used by well-advised taxpayers in such a way that the tax burden on the income generated is minimised as far as possible. Anyone who introduces such a system should not later complain about taxpayers who try to minimise their tax burden in an economically sensible manner through suitable arrangements.
Dr Thomas Elser is a tax consultant at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.
