Germany scraps ‘lump sum’ tax on alternatives

‘Lump sum’ taxation on German investors’ holdings in foreign alternative investment funds will be abolished, the country’s tax authorities have confirmed.

The lump-sum tax was ruled a breach of the EU principle of free movement of capital in a European Court of Justice decision in 2014. German tax authorities hope the changes will make alternative investment funds more attractive for domestic institutional investors, according to a client update from PwC.

The lump-sum tax was payable by German investors at a minimum of 6 percent of net asset value by investors in real estate and private equity funds, which are categorized as ‘non-transparent’ investment funds. It was also payable if a fund, foreign or domestic, did not complete tax reporting requirements for its German investors on time.

Investment funds will no longer need to file an annual German tax return, and equity and real estate investments will benefit from certain tax exemptions on the overall income of the fund.

In addition to these reforms, the authorities will require real estate and other non-partnership structured funds to register for a fund status certificate, a spokeswoman for the German Federal Central Tax Office confirmed.

The certificate allows for a reduction of withholding tax at the fund level from a total 25 percent to 15 percent, paid by a fund’s domestic investment. The tax is paid on dividend payments from shares issued by a fund’s German-resident investment.

Funds structured as partnerships, as private equity funds generally are, are exempt from registering.