Exit tax consequences due to changes of double tax treaties

Most of the recently enacted German double tax treaties include a clause for real estate-rich companies in the article on capital gains. Under this clause, capital gains from the alienation of shares deriving more than 50 percent of their value from real estate can be taxed in the state in which the real estate is located and are thus treated as if the real estate is sold directly. Including such a clause in a double tax treaty would mean that if the amended double tax treaty becomes effective, Germany will now have to share its - previous sole - taxing right of the capital gains on the sale of shares with the state in which the real estate is located. A potential double taxation will regularly be avoided by applying the credit method. On 26 October 2018, the German Federal Ministry of Finance issued a decree confirming that the exit tax may be triggered by such a change in the taxing rights according to an amendment of the respective double tax treaty even though the tax payer itself does not undertake any exit tax-triggering transaction. Our beinformed provides our view on the exit tax situation.

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Fund structuring costs for closed-end funds are tax deductible

The German Federal Tax Court held on April 26, 2018, that fund structuring costs, which are incurred in the investment period of closed-end funds, do not need to be capitalised but instead are tax deductible. This court decision is contrary to the established jurisprudence and practise of the German fiscal authorities in the past years.

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Proposed amendments to German taxation on investment funds

In early August, the German government passed draft legislation to prevent VAT losses on trade in goods on the internet and to amend other tax rules and regulations. The preliminary technical drafts for this legislative project carried the working title "Annual Tax Law 2018". This "Annual Tax Law" is intended to implement professionally required and necessary changes in tax law. These also include, among others, the amendments to the Investment Tax Act, which we will examine below (for more information on the planned tightening of inbound real estate investments, please see our beinformed dated July 31, 2018).

Note: This newsletter is only available in German language.