On November 29, 2019, the so-called Annual Tax Act 2019 passed the German Bundesrat (upper house) and is expected to be enacted before the end of this year. The Act introduces, inter alia, the requirement to capitalise fund structuring costs, which are incurred during the investment period of closed-funds set up as partnerships. The costs are not tax-deductible, but must be capitalised instead. This new rule will apply retroactively and is the reaction of the German legislator to a decision by the German Federal Tax Court dated April 26, 2018, according to which 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. We are pleased to assist your Tax Function to comply with the new rules.

In its judgement of May 22^nd, 2019 (I R 11/19) the German Federal Tax Court decided that in certain cases the German controlled foreign company (CFC) taxation may violate EU law. The judgement concerned controlled-company income from invested capital (so called Zwischeneinkünfte mit Kapitalanlagecharakter) with respect to third countries. In particular the missing opportunity to provide evidence to show that a shareholding in a low-taxed third country company is not the result of an artificial scheme was at question. In contrast to third country investments, the tax payer has indeed such opportunity to provide counter evidence since the judgement of the European Court of Justice concerning Cadbury-Schweppes for comparable investments within the European Union. In its judgement the German Federal Tax Court decided that a missing opportunity to provide counter evidence in a third party context indeed restricts the free movement of capital. However, such restriction might in certain circumstances be justifiable. According to the judgement at hand, a permissible circumstance is a situation, where the financial authorities are not able to verify the information provided by the tax payer in his counter evidence. According to the German Federal Tax Court this was indeed the case, as the judgement concerned an investment in a Swiss company in the years 2005 and 2006. During these years the ability to exchange information was limited between Switzerland and Germany. Only later in 2010 a broader clause to exchange information was implemented in the double tax treaty between Switzerland and Germany.

Even though the German Federal Tax Court ruled in this present case that the restriction of the free movement of capital was justifiable, the judgement implies that in a situation with sufficient exchange of information (which is meanwhile standard in most double tax treaties) the restriction of the free movement of capital may not be permissible. In other words, the German controlled foreign company (CFC) taxation may in certain circumstances violate EU law.

Whether the lump-sum taxation in accordance with section 6 of the German Investment Tax Act 2004 (GITA 2004) violates EU or constitutional law in the absence of the tax bases in accordance with section 5 of the GITA 2004 has been the subject of several judgments by the national tax courts and also by the European Court of Justice in the past. In response to these court judgments, the provisions of the lump-sum taxation were amended by the Act on the Reform of Investment Taxation of July 19, 2016 (Federal Law Gazette 2016 I, 1730). In its most recent judgment (14 May 2019 - VIII R 31/16), recently published, the German Federal Fiscal Court has now made a final ruling in the "van Caster and van Caster" case: The amended regulation on lump-sum taxation under section 6 of the GITA 2004 does not violate EU law and is also compatible with constitutional law.