Amendment of German Investment Tax Act 2018


On 14 December 2018, the German Act for the prevention of VAT failures in trading goods on the Internet and for the amendment of further tax regulations, Gesetz zur Vermeidung von USt-Ausfälle beim Handel mit Waren im Internet und zur Änderung weiterer steuerlicher Vorschriften (“the Act”), was promulgated. The Act amends the German Investment Tax Act (“InvTA”) and provides a number of significant changes relevant to partial tax exemption for investment funds.
Partial tax exemption:
Income received from investment funds can be subject to a defined partial exemption depending on the fund’s category. The Act introduces changes and supplementary conditions for granting partial exemption for equity funds, real estate funds, mixed funds and fund of funds. These new conditions may require the definition and implementation of new calculation procedures of equity or real estate ratios and amendments of investment policies.

Change in the minimum percentage for equity and real estate funds

According to the Act, an investment of more than 50% of the assets in equity participations or real estate should be sufficient for investment funds to be defined as equity or real estate fund. As for foreign investment funds, the tax authorities have not objected to this condition, as yet. The Act now establishes uniform standards, applying the lower rate for both domestic and foreign investment funds.

Reference to assets and definition of assets

Investment funds shall calculate their respective equity participation or real estate ratio in relation to their gross assets (previously "their value"). The amended InvTA defines gross assets as the value of the assets of the investment fund without the consideration of liabilities.

Alternatively, they should be allowed to use the net asset value instead of the gross asset value for the calculation. Applying the alternative net asset method, the investment funds’ borrowings must be proportionally deducted from the determination of the assets invested in equity participations or real estate.

Consequences of breaches of investment conditions

The Act incorporates into the InvTA the consequences of breaches of the investment conditions for the classification of a fund into different categories. Significant breaches and any resulting shortfall in the required participation ratios will result in the funds being denied the status of equity, real estate or mixed fund at that time.

A short-term shortfall in the participation ratio due to changes in the value of the assets held or an unintentional incorrect classification of an asset as an equity participation or real estate (passive limit breach) should be irrelevant and reasonable countermeasures should be initiated immediately.

Changes for fund of funds

The Act is intended to make it easier for fund of funds to achieve their respective participation rates as it requires the application of the minimum investment ratios disclosed in the investment conditions of target equity or target real estate funds. Also, equity or mixed funds of funds, under certain conditions, can apply the effective target investment fund ratios published on each valuation day. However, this should only apply to target investment funds, which carry out a valuation at least once a week.

Date of application and transitional provisions

The amendments to the InvTA will take effect retroactively from 10 August 2018.

The transitional provisions of the amending Act make it clear that equity, mixed and real estate funds, which have already adapted their investment conditions to the requirements of the InvTA applicable as from 1 January 2018, will continue to qualify as equity, mixed or real estate funds and therefore will not have to adapt their investment conditions again.

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