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Nexia Ebner Stolz

Tax Advice

Investment Tax Reform: Tips for Investors

With in­te­rest ra­tes at his­to­ric lows, in­vest­ment funds are a po­pu­lar in­vest­ment. But be­gin­ning Ja­nu­ary 1, 2018, new tax ru­les will ap­ply. In­ves­tors can pro­fit by plan­ning for the new ru­les now.

New: Ta­xa­tion at the Fund Le­vel – Par­tial Ex­emp­ti­ons at the In­ves­tor Le­vel

Cer­tain do­mestic in­come of do­mestic and for­eign mu­tual funds will now be sub­ject to cor­po­rate in­come tax at a rate of 15% or 15.825%. As a lump-sum com­pen­sa­tion for the new tax bur­den at the fund le­vel, par­tial ex­emp­ti­ons are avail­able de­pen­ding on the type of in­ves­tor and fo­cus of the in­vest­ment. These par­tial ex­emp­ti­ons are avail­able for all in­come of the in­vest­ment fund, i.e., for dis­tri­bu­ti­ons, ad­vance de­duc­tions and gains on sale.

Investment Tax Reform: Tips for Investors© Fotolia

Amount of the par­tial ex­emp­ti­ons:

Fund type

Minimum investment according to investment terms of the fund

Private assets

Business assets EStG

Business assets KStG

Equity fund

at least 51% in equity investments

30%

60%

80%

Mixed fund

at least 25% in equity investments

15%

30%

40%

Real estate fund

at least 51% in real estate and real estate companies

60%

60%

60%

Foreign real estate fund

at least 51% in foreign real estate and foreign real estate companies

80%

80%

80%

There can be tax ad­van­ta­ges or di­sad­van­ta­ges de­pen­ding on the type and com­po­si­tion of the in­come.

Here is an Ex­am­ple:

A pri­vate in­ves­tor owns sha­res of an in­vest­ment fund. The fund ge­ne­ra­tes €100 of do­mestic di­vi­dends, €100 of in­te­rest in­come and €100 of gains from the sale of do­mestic sha­res, and fully dis­tri­bu­tes its in­come.

Tax burden private investor (not including church tax)

Current taxation

Investment fund without partial exemptionInvestment fund without partial exemption

Mixed fund

Equity fund

Euro

Euro

Euro

Euro

Investment fund income

300.00

300.00

300.00

300.00

Tax burden at fund level

0.00

15.00

15.00

15.00

Accrual to the investor

300.00

285.00

285.00

285.00

Taxable to the investor

300.00

285.00

242.25

199.50

Investor tax burden

79.13

75.17

63.89

52.62

Total tax burden

79.13

90.17

78.89

67.62

Difference

-

11.04

-0.24

-11.51

Pri­vate in­ves­tors can be­ne­fit from a tax stand­point when they in­vest in in­vest­ment funds that meet the re­qui­re­ments for par­tial ex­emp­ti­ons. Thus, for ex­am­ple, Ex­change Tra­ded Funds (ETFs) are of­fe­red as phy­si­cally re­pli­ca­ting and syn­the­tic ETFs. While phy­si­cally re­pli­ca­ted ETFs in­vest in sha­res and are thus qua­li­fied as equity funds, syn­the­tic in­dex funds re­pli­cate the in­dex via de­ri­va­ti­ves and in some ca­ses have no or a very small mi­ni­mum in­vest­ment in sha­res. From a tax stand­point it is bet­ter to in­vest in phy­si­cal ETFs.

What about Cor­po­rate In­ves­tors?

This ap­plies ana­lo­gously to cor­po­rate in­ves­tors. But other par­tial ex­emp­tion ra­tes ap­ply here and only half of them ap­ply to trade tax, so that we would get the fol­lo­wing num­bers in our ex­am­ple, de­pen­ding on the le­gal form:

Corporate Investor

Sole proprietorship / Partnership under Personal Income Tax Act

Current taxationCurrent taxation

Investment fund without partial exemption

Mixed fund

Equity fund

Euro

Euro

Euro

Euro

Taxable under Trade Tax Act

260.00

285.00

242.25

199.50

Tax burden under Trade Tax Act

36.40

39.90

33.92

27.93

Taxable under Personal Income Tax Act

220.00

285.00

199.50

114.00

Tax burden investor

67.96

95.31

60.72

26.13

Total tax burden

104.36

150.21

109.64

69.06

Difference

-

45.85

5.28

-35.30

Corporate Investor

Company under Corporate Income Tax Act

Current taxation

Investment fund without partial exemption

Mixed fund

Equity fund

Euro

Euro

Euro

Euro

Taxable under Trade Tax Act

205.00

285.00

228.00

171.00

Tax burden under Trade Tax Act

28.70

39.90

31.92

23.94

Taxable under Corporate Income Tax Act

205.00

285.00

171.00

57.00

Tax burden investor

32.44

45.10

27.06

9.02

Total tax burden

61.14

100.00

73.98

47.96

Difference

-

38.86

12.84

-13.18

For cor­po­rate in­ves­tors it is also wor­thwhile to ex­amine whe­ther in­vest­ment funds meet the pre­re­qui­si­tes for the par­tial ex­emp­ti­ons. And to the ex­tent that it has stood up to the cur­rent com­pli­ca­ted ta­xa­tion sys­tem with a num­ber of tax ra­tios and ba­ses of as­sess­ment for an in­vest­ment in in­vest­ment funds, the con­side­ra­ble sim­pli­fi­ca­tion th­rough the new ta­xa­tion ru­les could pro­vide an ad­di­tio­nal in­cen­tive for a me­dium-si­zed in­vest­ment.

Tran­si­tion to the New Ru­les

The new ru­les go into ef­fect on Ja­nu­ary 1, 2018. A sale and purchase fic­tion is pro­vi­ded for the tran­si­tion to the new ru­les at the in­ves­tor le­vel. Un­der this fic­tion, exis­ting sha­res in the in­vest­ment fund will be deemed sold at the last redemp­tion price on De­cem­ber 31, 2017 and then deemed to be re­ac­qui­red on Ja­nu­ary 1, 2018. If this re­sults in a ta­xable gain, the gain will not be ta­xed un­til the in­ves­tor ac­tually sells the in­ves­tor's sha­res.

Ex­emp­tion for In­vest­ment Fund Sha­res Ac­qui­red be­fore Ja­nu­ary 1, 2009

The sale and ac­qui­si­tion of the exis­ting in­vest­ment fund sha­res is of par­ti­cu­lar si­gni­fi­cance for pri­vate in­ves­tors who ac­qui­red their in­vest­ment fund sha­res be­fore Ja­nu­ary 1, 2009. Un­til now these in­ves­tors could sell their sha­res tax-free and thus take ad­van­tage of price in­crea­ses tax-free wi­thout any time li­mit. Now, alt­hough price in­crea­ses up to De­cem­ber 31, 2017 will re­main tax free, any gains ob­tai­ned af­ter Ja­nu­ary 1, 2018 will be ta­xable un­der the new ru­les. For grand­fa­the­ring re­asons a per­so­nal al­lo­wance of €100,000 is gran­ted. Be­cause the ex­emp­tion only ap­plies to these old sha­res, in­ves­tors should take ad­van­tage of this "tax gift" and not dis­pose of the old sha­res ha­stily. For in­ves­tors who have a high vo­lume of old sha­res, gifts of in­vest­ment sha­res to spou­ses or child­ren be­fore De­cem­ber 31, 2017, should be con­side­red in or­der to take ad­van­tage of the ex­emp­ti­ons more than once.

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