The tax privilege for special investment funds is permissible according to a judgment made public by the Fiscal Court of Cologne on August 24, 2022 (Case No.: 12 K 1540/19).
Tax law allows for a tax privilege for special funds established under Luxembourg law. According to the Investment Tax Act in the version valid until December 31, 2017, it was possible to treat capital gains from foreign special funds as tax-free, according to the law firm MTR Legal, which focuses primarily on tax law.
An investor took advantage of these regulations by participating in an investment fund established under Luxembourg law in 2007. Participation in this fund was only possible for institutional, professional, and other knowledgeable investors within the meaning of Article 2 paragraph 1 of the Luxembourg Law of February 13, 2007, on specialized investment funds. This included, for example, the option to establish funds as “single-investor funds.” Here, private investors with a minimum investment of 1.25 million euros could become the sole investor in such a special fund, also known as millionaire funds. Capital gains from these special funds were not only tax-free but, as foreign income, they were also not subject to the German withholding tax.
The plaintiff in the underlying case took advantage of this tax privilege. He stated that he effectively influenced the management of the investment fund. The responsible tax office therefore did not consider the conditions for the tax privilege to be met. Since the management of the special fund effectively lay with the plaintiff, there was a violation of the principle of external management.
However, the Fiscal Court of Cologne saw this differently. The law does not recognize the principle of external management as cited by the tax office. Further, it cannot be assumed as an unwritten element of the offense through interpretation, according to the court.
The responsible tax office has filed an appeal against the decision of the Fiscal Court of Cologne. The appeal is pending before the Federal Fiscal Court under the case number VIII R 18/22.
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