Due to the implementation of the EU Directive on Alternative Investment Fund Managers (AIFM Directive), the German Capital
Investment Act, the Kapitalanlagegesetzbuch (KAGB), replaced the German Investment Act. It is applicable to both UCITS and alternative investment funds (AIFs). The implementation of the AIFM Directive led to the German Investment Tax Act (Investmentsteuergesetz– InvStG) being amended. The amended Investment Tax Act was enacted into German law on 24 December 2013. Notably, the Investment Tax Act has been fully revised and the new Investment Tax Act (InvStG-2018) will apply from 1 January 2018 (see below separate section below). In the rest of this chapter, the current InvStG, applicable until 31 December 2017, is described.
In principle, vehicles that qualify either as AIFs or as UCITS are now within the scope of the German Investment tax Act.
German open-end funds investing in real estate may only be set up as so-called Sondervermögen .
This contractual form of fund has no legal personality and must be managed by a German management company (Kapitalverwaltungsgesellschaft , or KVG), which is a stock corporation (AG), a limited liability company (GmbH) or a limited partnership (GmbH & Co. KG). One KVG may manage several funds. An Immobilien-Sondervermögen set up as a retail fund is accessible to all types of investors.
A German open-end fund is treated as a corporate entity for German tax purposes and is in principle subject to German corporate income tax and trade tax. If the German open-end fund fulfils the requirements to qualify as a so-called investment fund pursuant to the Investment Tax Act, it is exempt from German corporate income tax and trade tax.
There is no income tax at fund level on dividends received, capital gains realized, and other income received, provided that the investment entity qualifies as an investment fund within the meaning of the Investment Tax Act.
If the German open-end fund qualifies as an investment fund, investors are deemed to receive the fund income pro rata to their fund shares. The income is subject to taxation at Investor level in accordance with the investors’ personal tax status and the nature of the income. Income determination at fund level must comply with German tax provisions. If the German open-end fund does not qualify as an investment fund pursuant to the Investment Tax Act, distributions made will be treated as dividend income for German tax purposes. Investors might benefit from participation exemption.
If the German open-end fund qualifies as an investment fund pursuant to the Investment Tax Act, withholding tax is in principle levied on both distributed and retained fund income. Income derived from domestic and foreign dividends, interest and other capital income sources is subject to withholding tax at a rate of 26.375% (including a 5.5% solidarity surcharge) at fund level. Distributed income derived from domestic rental income and capital gains, realized on the disposal of German properties, is subject to withholding tax at a rate of 26.375% (including a 5.5% solidarity surcharge). The withholding tax rate may be reduced due to national rules for certain investor types or due to individual rules in relation to double tax treaties for international investors.Withholding tax is levied on distributed income only if the German open-end fund does not qualify as an investment fund.
From both an OECD Model and German tax perspective, treaty access should be granted to the fund. From the point of view of the treaty partner, there may be access for the fund itself, the KVG, or the investors as the beneficial owners of the fund’s income. The fund has no access to EU Directives developed for corporations.
If the German open-end fund qualifies as an investment fund according to the Investment Tax Act, special tax reporting (indicating e.g. the taxable income per fund unit) must be published on the website of the German Federal Gazette in order to ensure the fund’s tax-transparent status. Deadlines apply. For retail funds, there are no tax filing requirements for non-resident investors in Germany, and there should be no tax filing requirements for investors in the fund’s target countries.
The regulatory authority for German open-end retail funds and fund managers (KVG) is the Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority, BaFin). The fund is subject to its regulatory supervision.
The KGV must have prior written regulatory approval to manage the fund. For the fund itself, BaFin’s approval of the investment conditions is required.
The fund is restricted to investments in eligible assets, e.g. real estate properties (rental, commercial or mixed use), building land, property rights over real estate, shareholdings in real estate companies, cash, securities and REIT interests. Quotas apply. Debt financing is generally limited to 30% of the fair market value of the properties held by the fund. Further restrictions apply for German open-end funds qualifying as investment funds pursuant to the Investment Tax Act.