On 10 May 2022, the German Ministry of Finance published its final administrative guidance on the income taxation of crypto assets, esp. crypto currencies. The final guidance was long awaited since draft guidance had been published in June 2021.2
After public consultation, the German Ministry of Finance picked up the criticism on the draft 2021 guidance by stakeholders in the crypto environment and clarified some of the points addressed. The administrative guidance mainly focuses on the income tax treatment of crypto assets for natural persons; it does not contain any specific provisions on investment funds, joint ventures or private equity funds investing in crypto assets. However, some conclusions relevant for these investor types can be drawn from the general remarks of the administrative guidance.
Transferring the Ministry of Finance’s tax-legal qualification of capital gains from crypto currencies as a specific item of other income to the taxation of Investment Funds, leads to the conclusion that income from the sale of such crypto assets is non-taxable on the level of the Investment Fund.
For a so-called Opaque (or Chapter-2) Fund from a German income tax law perspective, this means that income from debt-like security tokens should be tax-exempt. Current income (dividend-like) from an equity-like security token should only be subject to tax in Germany, if the underlying equity is German sourced, while capital gains from equity-like security tokens should be tax-exempt. The tax treatment on the level of a German tax law Special (or Chapter-3) Fund will depend on whether the fund opted for transparency or not. In the latter case, the current income from an equity-like security token with a German underlying equity should be subject to tax in Germany.
On 13 December 2021, the regional Tax Court of Munich gave its decision in the ECJ case
C-641/17 – “CPP” dated 13 November 2019. The case concerns a Canadian pension fund that invested into German equity assets via pooled investment portfolios and suffered German WHT on dividends.
In the prior decision by the ECJ of 13 November 2019, the ECJ holds that a German tax rule, which prevents a Canadian pension fund from reclaiming/crediting WHT on German dividends, whilst a German pension fund is allowed to credit WHT suffered on German dividends, is contrary to the free movement of capital.3 The ECJ referred the case back to the German regional court to give its final decision, on whether German WHT will be reimbursed to the Canadian pension fund or not.
The Tax Court of Munich in its decision of 13 December 2021 denies the reimbursement of German WHT to the Canadian pension fund. The regional Tax Court holds that the Canadian pension fund is not comparable to the German pension fund, because it is not subject to accounting rules that provide for a profit reducing actuarial reserve, as is the case for German pension funds. According to the regional Tax Court, the lack of similarity of applicable accounting rules cannot be cured by the fact that the Canadian pension fund is obliged to use all of its net assets to fulfill pension obligations.
The Tax Court of Munich upon first sight seems to implement a narrow understanding of comparability, by insisting on the application of similar – and not comparable – accounting rules. However, in the detailed analysis of the decision it appears that the facts which were presented to the ECJ – and thus led to the ECJ decision, which finds a breach of the free movement of capital in the German law applied to the case – turned out to be different than previously expected. The ECJ decision is based on the understanding, that the Canadian pension fund established an actuarial reserve comparable to that of a German pension fund. As this was indeed not the case for the Canadian pension fund, the Canadian pension fund is not comparable to a German pension fund (“Pensionsfonds”) but rather to a German pension scheme (“Pensionskasse”). The German pension scheme – like the Canadian pension fund – suffers German WHT on German dividends. For this reason, the regional Tax Court denies a breach of EU law in the specific case.
The Canadian pension fund formally filed an appeal with the German Federal Fiscal Court against the decision of the Munich court. At present, it is uncertain, whether the German Federal Fiscal Court will admit the appeal on formal grounds.
The lesson learnt from the regional Tax Court’s decision is that the comparability of a non-resident entity with a resident entity has to be examined carefully, especially whether the national law provides for similar legal concepts with different tax legal consequences.
On 2 February 2022, the German Federal Fiscal Court (“BFH”) gave another ruling on the tax legal concept of economic ownership, this time in the context of cum/ex transactions.
In so-called cum/ex transactions, a person entitled to a full reimbursement of German WHT – in the case at hand a US pension fund entitled to benefits under the German-US double tax treaty (“DTT”) – bought German equity assets cum (with dividend entitlement) but the equity assets were delivered ex (without dividend entitlement). After delivery of the equity assets, the assets were re-transferred to the former owner. The transactions were accompanied by multiple hedging and financing instruments. An alleged loophole in German tax law constructed out of the – to say the least: imprudent – mixture of an intellectual glitch by the Federal Tax Court, collaborative parts of academia plus much business greed seemed to – formally – allow for the reimbursement of German WHT in case of a cum/ex transaction, even though German WHT had actually not been levied. The resulting tax losses for the German treasury probably amounting to several billion euros. The alleged loophole was closed in 2012. Numerous players involved in the cum/ex scandal were charged with criminal offences in Germany, some of them already convicted, several lawsuits are still ongoing. Switzerland just extradited a German national, said to be the mastermind of the cum/ex scheme, based on charges of fraud.
The BFH decision of 2 February 2022 is the first decision of Germany’s highest tax court in the context of the cum/ex scandal. As expected, the BFH denies the reimbursement of WHT on German dividends to the US pension fund – which according to the German-US DTT would be entitled to a full reimbursement of WHT – because the US pension fund is not the economic owner of the equity asset paying the dividend from a German tax law perspective.
As a general rule under German tax law, an asset – and the respective income streams – is assigned to the civil law owner of the asset. However, in situations where a different person is able to exclude the civil law owner from exercising ownership rights over the asset for the general operating life of an asset, the tax-legal ownership of the asset and its income streams are allocated to that different person, the so-called economic owner.
The BFH confirms that civil law ownership of a security is not transferred at the time of sale, but when the security is delivered, i.e. when the security is booked on the account of the recipient, usually within 3 business days after the purchase.
The core of the recent decision is that the BFH denies the transfer of economic ownership, not only at the time of the sales contract but also at the subsequent transfer of civil law ownership. The BFH argues that the US pension fund did not actually benefit economically from the equity asset transferred, and – most importantly – the US pension fund was not intended to economically benefit from the equity asset or dividend, according to the overall concept and all transactions included therein. For the time of the sale, the lack of economic entitlement of the US pension fund is – according to the BFH ‘obviously’ – due to the fact that the transaction was closed with dividend entitlement but settled without dividend entitlement. The lack of economic entitlement is further evidenced by the fact that risks and chances of the overall transaction were allocated to other parties. However, the BFH did not have to decide which other party involved in the overall concept is the economic owner of the equity assets.
The recent BFH decision is in line with previous case law, under which economic ownership has to be evaluated on a case by case basis, deciding whether the position of a civil law owner is a mere formal one, or whether the risks and chances of an asset were actually transferred. However, in previous decisions the BFH assessed economic ownership mainly in OTC transactions. The decision at hand applies the settled case law also to transactions settled via the stock exchange.
Another remarkable aspect of the decision is that the BFH – without apparent need – comments on the application of the principles of economic ownership differing from civil law ownership with respect to digital assets, such as crypto currencies. It might be a hint that the BFH agrees with the majority opinion that crypto assets or currencies qualify as “assets” within the German tax legal definition
If you wish to discuss these topics, please contact: WTS Germany, Frankfurt
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