Germany: Upcoming legislation on crypto assets, new fund types, WHT reclaims and ATAD

Digitized securities / crypto assets

In May 2021, after substantial discussion with the industry in late 2020, German parliament passed a bill covering the introduction of digital securities plus their civil and supervisory law aspects. The new rules will become effective in June 2021.

In contrast to previous German law - under which a paper-based representation of a security was required and to be stored by the (fund) custodian – the new law foresees the option that the digital security will be based on a digital register only. The register will usually be a central register, mainly transposing the current paper-based and electronically backed up registration and disposals to an actual digital system.

However and importantly, the bill also introduces the possibility for a decentralized crypto register (privately permissioned), without favoring any specific distributed ledger technology. The bill does not provide for a transitional arrangement for already existing tokens, i.e. they will have to be registered retroactively, if in scope of the new law.

Though the government’s step towards the digitization of securities is well received in principle, the market impression is that the bill is lacking ambition. For example:

• The bill only refers to debt securities and fund units; shares of stock companies are not covered.
• The scope of the decentralized crypto register is limited to debt securities only.

Thus, the road for tokenized fund units is not open (yet). However, the bill allows for the Germany Ministry of Finance to expand the decentralized crypto register to tokenized fund units by way of regulation without a further time consuming parliamentary process.

Further, even though the bill foresees a decentralized crypto register, an institution that is formally responsible for the register is necessary. The role of the register keeping body can either be assumed by the issuer of the crypto asset itself or by a service provider. While it is understandable from a regulatory perspective that a responsible entity is necessary, this condition seems irritating, as the principle of a decentralized register is not to accumulate access and responsibilities in one hand.

With regards to taxation, it is noteworthy that neither the above legislation nor other specific tax provisions cover crypto assets, except for currencies: the VAT treatment of Bitcoin and comparable crypto currencies is dealt with in administrative guidance. The tax administration recently announced guidance on the income taxation of crypto currencies. There is no primary wording of the law or administrative guidance or court decision – directly – applicable to the income taxation of crypto assets in German tax law yet; the German tax law results have to be derived from (comparable) general tax law rules.

New fund types

On 22 April, the German legislator passed several measures to enhance Germany’s attractiveness as a location for the establishment of collective investment schemes.⁵ The rules should become effective by August 2021. Some of the highlights are as follows:

• Introduction of closed-ended master-feeder structures
• Crypto-assets become permissible assets for all kinds of Special AIFs, from a regulatory and tax-legal perspective
• Introduction of new fund types such as Infrastructure Funds (Infrastruktur-Sondervermoegen) and Development Funds (Entwicklungsfoerderungsfonds)
• Investment management services delivered to venture capital funds are exempt from VAT
• Streamlining of the communication with the BaFin, communication shall predominantly be electronic, not paper-based.

German WHT reclaims in the future

The third legislative project is the streamlining and digitization of WHT reclaim procedures, mainly aiming at the prevention of potential tax-fraud. The main body of the new rules will come into effect with the beginning of 2024. The key measures include the following:

• Centralization of competence for all WHT relief at source applications and retroactive refund claims with the German Federal Office of Finance (“BZSt”), regardless of their legal nature (national law, DTT rules, CJEU case law). This change in competence will come into effect with the adoption of the act in June 2021, not in 2024 like the other provisions.
• Centralized collection of WHT related data with the BZSt
• Data collection is supplemented with an increase of reporting obligations for paying agents of dividends and their increased liability
• Obligation of stock companies to identify all of their shareholders to the BZSt; the legislator reacted to substantial criticism of the industry and prolonged the entry into force until 2025.

For more details, please see our WTS Global Financial Services Infoletter # 20 of March 2021.

ATAD implementation

In June 2021, Germany will finally adopt the implementation of ATAD into national law.

The bill contains good news for the fund industry, as investment funds will generally not be subject to CFC rules if they are in scope of the German Investment Tax Act (GITA), at least in the case of retail funds. The bill aims to maintain the exclusive applicability of the beneficial German investment tax law to foreign funds that are comparable to German mutual funds, like UCITS, and retail AIFs. This approach prevents foreign mutual funds from being disadvantaged compared to German domiciled funds via adverse taxation under the German controlled foreign company (CFC) regime.

An important exception might affect especially international AIFs, if a German investor or a group of affiliated German persons controls the fund entity. The controlling investors as such will be disregarded the applicability of the preferential GITA rules, if the fund income generated with affiliated investors exceeds a threshold of more than 1/3; only the disadvantageous CFC rules will apply.

In addition, it should be noticed that controlled investment funds, i.e. those that stay below the 1/3 threshold named, can no longer serve as a blocker concerning CFC-income which occurs on subordinate level, unlike under the current German CFC provisions. Subordinate CFC entities of investment funds should be analyzed and possibly restructured before the new rules will come into effect.

The rules described above are expected to come into effect from 1 January 2022.

VAT treatment of services provided by stock exchanges and other trading platforms

On 3 May 2021, the German Ministry of Finance published an administrative decree regarding the VAT treatment of services provided by stock exchanges and other trading platforms for financial products, incl. virtual currencies (e.g. Bitcoin). In a nutshell, the decree contains the following:

• The technical connection of market participants to the stock exchange operation and the provision of the stock exchange programs - unlike the service provided as a CCP – are part of the uniform service rendered by the stock exchange. This service is usually exempt from German VAT.
• Matching, clearing and settlement constitute one uniform service, if executed by a single service provider. This service is usually exempt from German VAT.
• If the stock exchange operator as a technical provider makes available the IT stock exchange programs and operates them without connection to a trading transaction, these are other services, which are not exempt from VAT.

The decree is applicable to all open cases.

If you wish to discuss these topics, please contact: WTS Germany, Frankfurt

Read the WTS Global Financial Services Newsletter here.