The tax privilege for special investment funds is permissible according to a judgment of the Cologne Finance Court published on August 24, 2022 (Case No.: 12 K 1540/19).
Tax law allows for tax privileges for special funds established under Luxembourg law. According to the Investment Tax Act in the version applicable until December 31, 2017, it was possible to treat capital gains from foreign special investment funds as tax-free, as stated by the law firm MTR Legal, which has a focus on tax law.
This regulation was utilized by an investor who participated 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 also included, for example, the option to establish funds as “single-investor funds.” Here, private investors with a minimum deposit of 1.25 million euros could become the sole investor in such a special fund, also known as millionaire’s funds. The capital gains from these special funds were not only tax-free, but as foreign income, they were also not subject to the German flat-rate withholding tax.
The plaintiff in the underlying case had claimed this tax privilege. He stated that he had in fact exerted influence on the management of the investment fund. The responsible tax office considered the conditions for the tax privilege not fulfilled. Since the management of the special fund was effectively carried out by the plaintiff, this violated the principle of external management.
However, the Cologne Finance Court saw this differently. The law, according to the court, does not recognize the principle of external management as presented by the tax office. Moreover, it cannot be assumed as an unwritten element through interpretation.
The responsible tax office has appealed against the decision of the Cologne Finance Court. The appeal is pending with the Federal Finance Court under the case number VIII R 18/22.
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