Recently, the German Ministry of Finance (MoF) presented two new important draft pieces of tax rules in many ways relevant for the international Financial Services industry.
On the one hand, the draft bill for a Growth Opportunity Act provides for a number of tax adjustments that directly and indirectly affect the fund industry, especially important for real estate funds with German assets (interest deduction limitation). Secondly, the MOF published the draft of an application decree to the German Foreign Tax Act (AStG); it concerns the German add-on taxation regime, relevant especially for (foreign) Private Equity funds with German investors.
Draft bill of a Growth Opportunities Act
On 30 August 2023, the German Cabinet approved a draft law on the Growth Opportunities Act. The parliamentary legislative procedure is still pending. In principle, the law is to take effect from January 1, 2024.
The 287-page draft aims to expand economic opportunities, spur investment and innovation in new technologies, and bolster Germany's position as a global business hub.
With regard to the taxation of domestic and foreign investment funds in Germany under the German Investment Tax Act, there are interesting proposals:
Draft of decree to the German Foreign Tax Act
The draft of a decree to the German Foreign Tax Act incorporates changes brought about by the German ATAD Implementation Act and includes updates on transfer pricing, exit taxation, taxation of income from foreign intermediate companies, and foundations. It also addresses issues arising from developments in the economy, such as changes in business models and digitalization.
In the context of the Financial Services industry, the regulations on the add-on taxation of German investors of international Private Equity funds with income from controlled companies are of particularly high importance. Due to falling tax rates worldwide, the relevance of add-on taxation has increased in recent years. Taxpayers are often confronted with the issue of add-on taxation in the course of tax audits.
Compliance with the German foreign income tax reporting requirements regularly requires a high degree of cooperation on the part of foreign companies that are the target of German investment in order to avert negative tax consequences for the German investor. However, this burden on German investors and their affiliated target companies is further increased by the fact that the new German add-on taxation regime pursuant to the German ATAD Implementation Act introduced considerable legal uncertainty.
The new draft of the German Tax Authority comments on the details of the German add-on taxation on approx. 130 pages. While it is, in general, to be welcomed that the German Tax Authority is finally providing guidance on the application of the German add-on taxation regime after the implementation of the ATAD directive, the draft — for now — fails to provide conclusive answers with regard to several disputed issues.
Example: Acting in concert
With a view to especially Private Equity funds, regarding partnerships there is a rebuttable legal presumption of concerted action by the partners. This presents investors in investment vehicles
structured as a partnership with the challenge of disproving their interaction. The conditions to dis-prove this presumption have been controversial since the regulation was originally enacted.
The wording of the draft with regard to the general requirements of concerted action remains vague and open (“may speak for concerted action”) so that a case-by-case consideration seems recommendable.
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