Special investment funds are eligible for preferential tax treatment, according to a recent ruling of the Finanzgericht (FG) [Fiscal Court of] Cologne from August 24, 2022 (case ref.: 12 K 1540/19).
German tax law allows special funds established under Luxembourg law to benefit from certain tax privileges. MTR Legal Rechtsanwälte, a commercial law firm whose areas of expertise include tax law, notes that it was possible under the version of the German Investment Tax Act (Investmentsteuergesetz) that was applicable until December 31, 2017, for capital gains from foreign special funds to obtain a tax-exempt status.
One investor who took advantage of the Act’s provisions had acquired a financial interest in one such fund back in 2007. Only institutional, professional, and other expert investors within the meaning of Article 2(1) of a Luxembourg law dated February 13, 2007, concerning specialized investment funds could invest in this fund. The legislation allowed for the establishment of single-investor funds, which made it possible for private investors willing to contribute a minimum of 1.25 million euros to become the sole investor in one of these special funds, also known as millionaire funds. Any capital gains deriving from these special funds were not just tax exempt in a narrow sense; as foreign income, they were not even subject to German withholding tax (Abgeltungssteuer).
It was this preferential tax treatment that the plaintiff had invoked in the instant case. At the same time, they claimed to have exerted de facto influence on the management of the investment fund. With the relevant tax office therefore concluding that de facto responsibility for managing the special fund lay with the plaintiff, it decided that the conditions for invoking this privileged status had not been met and that the arrangement was inconsistent with the principle of third-party management.
The Finanzgericht Köln took a different view, ruling that the law did not recognize the principle of third-party management as stated by the tax office. Moreover, it could not be read into the law as an unwritten criterion here.
The tax office in question has since responded to the Finanzgericht’s decision by lodging an appeal, which is currently pending before Germany’s Federal Fiscal Court – the Bundesfinanzhof – as case number VIII R 18/22.
Should tax disputes arise with the authorities, those concerned can turn to the team of experienced tax lawyers at MTR Legal for advice and support.
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