ATAD II – Planned Implementation in Germany Leads to Confusion and Significant Consequences for the Fund Industry
On 10 December 2019, the German Federal Ministry of Finance (“BMF”) adopted a draft law on the implementation of the Anti-Tax Avoidance Directive of 12 July 2016 (“ATAD I”) and its successor of May 29 2017 (“ATAD II”) (“ATAD Implementation Law”, ATAD-UmsG). The ATAD Implementation Law will apply retroactively to all matters from 1 January 2020. Legislative implementation has not yet taken place. This newsletter will provide information on the current draft law with regard to the ATAD Implementation Law and on the planned changes contained therein to the foreign tax act (“AStG”) and in the version of the draft law to the foreign tax act (“AStG-E”).
Within the planned reform of the AStG, potential implications for the investment fund industry become apparent, particularly when turning away from the primacy and shielding effect of the German Investment Tax Act (InvStG) in relation to the AStG. As a result, Luxembourg investment funds in the legal form of a corporation, such as the société d’investissement en capital à risque (“SICAR”), the fonds d’investissement spécialisé (“FIS”), and the fonds d’investissement alternatif réservé (“RAIF”, hereinafter jointly referred to as “Funds” or “Investment Funds”), may now be subject to the AStG. According to Section 7(1) of the AStG-E, retained profits of the Funds and any subsidiaries taxed at a low rate are to be directly attributed to German investors and treated as taxable dividends in Germany.
Reform of Controlled Foreign Corporation Rules and Their Impact
The controlled foreign corporation (CFC) rules have been governed by the AStG since 1973 and aim to prevent that (appropriate) taxation in Germany is avoided through the involvement of foreign companies taxed at a low rate (“Intermediate Companies”). According to the current law, these foreign Intermediate Companies are foreign companies which generate passive income, such as interest, and whose effective tax burden is less than 25%. The shielding effect of the Intermediate Company or a Luxembourg Investment Fund is now to be repealed by the AStG-E.
As part of the reform of CFC rules, pursuant to Section 7(7) of the AStG-E, the primacy of the German Investment Tax Act (“InvStG”) in relation to the AStG is to be repealed. The repeal of this primacy may result in a (temporary) double taxation since, in addition to the advance lump sum set forth in Section 16 of the InvStG, the CFC rules in accordance with the AStG-E will also apply.
The ATAD Implementation Law does provide for anti-avoidance rules with regard to double taxation. However, the elimination of the primacy of the InvStG results in considerable additional administrative burdens and costs for the fund industry since, in addition to the provisions set out in the InvStG, those of the AStG must also be considered and observed. In this context, it should be noted that the exclusive determination of income in accordance with Section 4(1) of the EStG (incomplete comparison of business assets) provided for by the ATAD Implementation Law would eliminate the possibility of using the cash method of accounting as defined in Section 4(3) of the EStG. Furthermore, the intended determination of taxable amounts for each known investor would also lead to a new organizational hurdle and the need of having to deal with foreign law.
In the course of the legislative procedure, the next step will be for the Cabinet of Germany to decide on the draft law submitted. If the decision is positive, the ATAD Implementation Law will be introduced as a bill by the Federal Government in the German Bundestag. Therefore, it remains to be seen to what extent the planned amendment will actually be implemented in its current form.
AIQUNITED will be happy to assist you with the preliminary analysis of the scope of application, the preparation of tax compliance regulations within your company structure as well as with any other questions you may have, and will continue to provide you with further information on this topic.
 EU Directive 2016/1164; EU Directive 2017/952; for further details of the ATAD Directives please see our separate newsletter on our website (www.aiqunited.com/blog).