No tax exemption according to § 11 para. 1 Sentence 2 InvStG for foreign investment funds

The tax exemption provision of Section 11 para. 1 sentence 2 InvStG old version is compatible with the free movement of capital. This was decided by the Hessian Fiscal Court.

Key Facts

The Hessian Tax Court ruled that the tax exemption only applies to domestic investment funds.
The complaint concerned the validity of Section 11 InvStG with regard to the free movement of capital.
Société d'Investissement à Capital Variable sued for reimbursement of the capital gains tax.
The court dismissed the claim and did not see any refund claims for foreign funds.
The different treatment of funds is justified by coherence in line with European law.
A balanced distribution of taxation is ensured by the transparency principle.
The ruling is not yet legally binding and an appeal to the Federal Fiscal Court is pending.

The parties essentially dispute whether Sec. 11 InvStG in the versions applicable in the years 2009 to 2013 violates the free movement of capital.

The plaintiff was a Luxembourg-based Société d’Investissiment á Capital Variable (SICAV) in the legal form of a Société Anonyme (S.A.). It held shares in German companies and, without having a branch in Germany, received distributions from domestic corporations in the years 2009 to 2013, on which – taking into account the refund procedure based on the DBA-Luxembourg and carried out by the plaintiff’s custodian bank – 15% capital gains tax was attributable as a result. The plaintiff unsuccessfully applied for a refund of these capital gains taxes. In support of its claim, it argued that Sec. 11 InvStG only exempts domestic investment funds from taxation in a manner contrary to European law.

The Hessian Tax Court dismissed the action as unfounded. The plaintiff is not entitled to a (capital gains tax) refund. As a foreign investment fund, it does not fall under the national tax exemption provision of Section 11 (1) of the German Income Tax Act, which applies only to domestic investment funds. 1 sentence 2 InvStG.

The different treatment of domestic and foreign investment funds does not constitute a violation of the free movement of capital guaranteed under European law.
It is true that there is unequal treatment of foreign and domestic investment funds due to the provision in Section 11 para. 1 InvStG, but this is justified by consistency and the need to maintain a balanced division of taxation powers.

Coherence requires the balancing of advantages and disadvantages within the framework of an overall consideration involving the shareholder, whereby the balancing must neither be understood mathematically nor must occur in the same person. Due to the transparency principle applicable to domestic fund taxation, there is a direct connection between the taxation of the investment fund and the shareholder, so that the taxation of the shareholder must be included in the comparative analysis of the tax burden.

Taking into account the taxation of the shareholder, a balanced allocation of taxation powers is maintained by the national exemption provision within the framework of an overall view. This is because the unit of fund and unit holder is only charged once in the result when the imputation rules are included. Within the scope of the comparative analysis, not only a differentiation between domestic and foreign investment funds had to be made, but also a differentiation according to whether the shareholder was a tax resident or a tax non-resident and whether he or she participated in a domestic or foreign investment fund.

Any remaining unequal treatment with regard to the tax credit would have to be resolved, in accordance with the principle of proportionality, primarily by an interpretation in conformity with European law, in this case of Sec. 4 (4) of the German Income Tax Act. 2 InvStG, to be offset.

In the opinion of the Senate, the provision is also in conformity with European law against the background of recent ECJ case law.

The judgment of 21.08.2019 is not yet final. The appeal has been lodged with the Federal Fiscal Court under Ref. I R 1/20 pending.

Author: Marian Härtel

Marian Härtel ist Rechtsanwalt und Fachanwalt für IT-Recht mit einer über 25-jährigen Erfahrung als Unternehmer und Berater in den Bereichen Games, E-Sport, Blockchain, SaaS und Künstliche Intelligenz. Seine Beratungsschwerpunkte umfassen neben dem IT-Recht insbesondere das Urheberrecht, Medienrecht sowie Wettbewerbsrecht. Er betreut schwerpunktmäßig Start-ups, Agenturen und Influencer, die er in strategischen Fragen, komplexen Vertragsangelegenheiten sowie bei Investitionsprojekten begleitet. Dabei zeichnet sich seine Beratung durch einen interdisziplinären Ansatz aus, der juristische Expertise und langjährige unternehmerische Erfahrung miteinander verbindet. Ziel seiner Tätigkeit ist stets, Mandanten praxisorientierte Lösungen anzubieten und rechtlich fundierte Unterstützung bei der Umsetzung innovativer Geschäftsmodelle zu gewährleisten.