Tax relief for investment funds

On 9 April 2020, the German Federal Ministry of Finance (“BMF”) released a decree, which provides tax relief for investment funds. In order to protect investment funds from the negative effects of the corona crisis, a “passive threshold violation” (“passive Grenzverletzung”) of a fund between 1 March 2020 and 30 April 2020 should not, in principle, result in a “substantial violation” (“wesentlicher Verstoß”) of the fund’s investment regulations. This avoids tax consequences for the fund that would otherwise be caused by the violation.

Previous legal situation

According to Section 2 (6) and (7) Investment Tax Act (Investmentsteuerrecht), certain investment conditions apply to equity or mixed funds, including fixed ratios regarding the proportion of their assets that must be invested in equity investments (more than 50% for equity funds, more than 25% for mixed funds). If these ratios are not reached, it is referred to as “threshold violation”. While an active threshold violation is due to an activity of the fund manager that leads to a change in the fund’s asset structure, a passive threshold violation results from price or rating changes of the fund’s assets. In both cases, depending on the circumstances of the individual case, from the point of view of the tax authorities (see BMF-decree dated 21 May 2019, BStBl I S. 527, no. 2.18) there may be a substantial violation of the investment regulations, with the result that the fund loses its status as an equity or mixed fund. As a consequence, they would no longer benefit from the partial tax exemption (“Teilfreistellung”) under Section 20 InvStG. However, this should not normally apply if the fund falls below the asset thresholds of the investment regulations for a maximum of up to 20 business days in a financial year (see BMF-decree dated 21 May 2019, no. 2.19).

For special investment funds, detailed investment regulations also apply pursuant to Section 26 InvStG, including those relating to the asset structure. A substantial violation of these due to an active or passive threshold violation results in the loss of the status of the special investment fund, so that the fund can no longer exercise the tax-advantageous transparency option (“Transparenzoption”) in accordance with Section 30 InvStG.

Tax relief due to the corona crisis

The current BMF letter states that - irrespective of the circumstances of the individual case - a passive threshold violation between 1 March 2020 and 30 April 2020 of an equity or mixed fund should not in principle be considered a substantial violation in the above sense. Furthermore, the days on which the asset thresholds are violated are not counted towards the 20-business day limit.

For special investment funds, it applies accordingly that a passive threshold violation between 1 March 2020 and 30 April 2020 should in principle not lead to a substantial violation of the fund’s investment regulations under Section 26 InvStG.

We have compiled on our website comprehensive information and recommendations for action in response to the legal implications arising from the coronavirus pandemic: https://deutschland.taylorwessing.com/en/coronavirus