Basically, foreign and German domestic funds are to be separated into three different groups, for each of which different tax schemes apply.
UCITS
Highly regulated investment funds remain in the well-known ‘G-Tax’ system. Those vehicles are subject to a look-through concept where ordinary income as well as capital income is subject to normal tax rates. Some smaller advantages with regards to the timing of taxation are given. However, the above mentioned rules can only be used in the case of proper documentation and publication of data. Otherwise, the investor is subject to a prohibitive lump sum taxation.
Certain Corporate Structures
Vehicles which are non-UCITS and also meet certain UCITS equivalent requirements are treated like ordinary corporations. Distributions received by German residents are treated as dividend income. The concept of deemed distributions does not apply and WHT tax incurred at fund level must not be credited on investor level. However, the deemed distribution model also does not apply, which could be a significant advantage as long as German CFC rules do not apply at the same time.
Certain Partnership Structures
Where neither the standard UCITS nor the rules for corporate structures apply, the General Fiscal Code requires so-called Feststellungserklärungen (F-Return). The F-Return is based on a look-through concept for all assets of the fund regardless of whether those assets generate ordinary income or capital income. The F-Return is much less streamlined than the G-Tax calculation and as a consequence much more time needs to be invested. However, in many cases the tax effect on investor level is not much different from the G-Tax rules.
In Summary
German investors will focus much more on the after-tax effect of their income derived from investment funds. The tricky part is the distinction between the three tax systems as no official register outlines which fund falls into which system.
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