In the course of the German Investment Tax Reform 2018, the taxation of investment funds and their German investors changed fundamentally. In order to transition from the old (pre-2018) investment tax law to the new rules, fund units held on 31 December 2017 were deemed to be sold and newly acquired one logical second later. However, the tax on this deemed realization only becomes due once the investor actually sells the corresponding fund units. The capital gain determined for the period prior to 2018 and the profit or loss incurred thereafter are calculated separately; regarding gains / losses from the period after 2018, a 30% tax exemption applies for German private investors in standard retail funds (Chapter-2 Funds).
These rules can lead to interesting results if fund units had a positive performance between their acquisition date and the end of 2017, but then lost in value. In such cases, fund investors may have to pay taxes on deemed capital gains that are never actually realized. It is possible that the overall tax burden exceeds the amount of the realized profit.
In the case at issue, which is now before the German Federal Fiscal Court (BFH) for an appeal decision, the plaintiff invested in foreign equity funds in the years of 2009 to 2017. Under the transitional rules of the investment tax reform, his fund units were deemed sold on 31 December 2017 and newly acquired on 1 January 2018. At the end of December 2017, the market value of the fund units was high, so a tax base of approximately 2,250 € was determined for the deemed realization. However, by the time of the actual sale of the fund units at the end of 2018, the value of the fund units had fallen so that the plaintiff realized a capital loss for the time period in 2018. In total, from the acquisition in 2009 to the actual sale at the end of 2018, the fund investor realized a capital gain of just under 600 €. The fictitious gain from the deemed sale on 31 December 2017 was then fully taken into account, while only 70% of the loss resulting from the year 2018 were recognized. As a result, the actual capital gain was fully consumed by the tax burden of just under 600 €.
This result was challenged by the plaintiff before the Cologne Fiscal Court, which dismissed the case but allowed it to be appealed. In comparable cases, investors should consider filing an objection with their respective fiscal authority against their tax assessment and a request for the proceedings to be suspended with reference to the now pending appeal. In our view, however, the appeal has little chances of success.
If you wish to discuss this topic, please contact: WTS Germany, Frankfurt
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