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The Federal Ministry of Finance has issued a directive clarifying the meaning of sec. 20 (1) no. 7 EStG, a provision in the income tax law providing for the taxation of income from "other claims of any sort for the payment of money (Kapitalforderungen)". The clause is a catch-all provision intended to prevent avoidance of income tax liability by use of investment instruments not subsumable under the other, more specific money claims listed in sec. 20 EStG as giving rise to income from capital (hence the term "other money claims," i.e. money claims not otherwise dealt with in sec. 20 EStG).
Pursuant to sec. 20 (1) no. 7 EStG, income from capital also includes income from other claims of any sort for payment of money arising from the transfer of capital for use by another person and involving a right to repayment, or repayment in fact, of the capital transferred or involving a right to payment, or payment in fact, for the use of the capital transferred, even if the amount of the payment for the use of capital is contingent on an uncertain event. The designation and specific terms of the capital investment are irrelevant.
This provision was added to the income tax law with effect from 1994. It has never been interpreted literally in that financial instruments as to which both the repayment of the transferred capital and payment of a return on this capital are uncertain (contingent on uncertain events) have not been regarded as within the scope of the clause. An instrument by the terms of which both repayment of the principal amount and the return are linked to an index is one example, provided a risk of complete loss exists as a factual matter. Income from such investments does not constitute taxable income from capital in spite of the fact that such income might be regarded as covered by the "payment or repayment in fact" condition of the clause.
The tax authorities have now confirmed this reading of the statute (directive of 14 January 1998 - DB 1998, 497). The words "payment or repayment in fact," they explain, are intended to apply to instances in which repayment of the transferred capital or payment of a return is certain to occur as a factual matter even though the instrument does not involve an express or tacit legal obligation to make such payment. If "neither repayment of the principal amount nor payment of a return for the use of the principal amount is certain to occur," any income from the instrument is not taxable under sec. 20 (1) no. 7 EStG.
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