Germany: Final Version Of German Investment Tax Circular Published

On 21 May 2019, the German Federal Ministry of Finance (BMF) published its long-awaited circular on the German Investment Tax Act (GITA) in the version effective from 1 January 2018 (the "Circular", BMF letter as of 21st of May, 2019, Ref.: IV C 1 - S 1980-1/16/10010:001). The Circular addresses in particular the provisions for (simple) investment funds (§§ 1-24) and the application and transitional provisions (§ 56 GITA).

These provisions affect, among other things, private equity funds and funds of funds organized as corporations and segregated assets (Sondervermögen) (hereafter "Investment Funds"). We have summarized selected aspects of particular relevance for the private equity sector below.

Executive Summary

  • A fund-level tax exemption in relation to business income generally now "only" requires, with regard to trade tax and corporate tax alike, that there is not significant active entrepreneurial management of investments. As such, certain business income is detrimental neither for corporate tax purposes nor for trade tax purposes.
  • The Circular takes a divergent position on the important question for funds of funds of to what extent Investment Funds are subject to corporate tax and trade tax when investing in target funds structured as partnerships that are engaged in a trade or business for German tax purposes.
  • Whether investors invest directly or indirectly in Investment Funds via partnerships is not relevant for the calculation of partial tax exemption rates.
  • Beginning in 2020, a list of the actually attained percentages for each business day is to be required to document that the requirements have been met for partial tax exemptions in investors' assessment procedure.
  • The financial authorities are adhering (in keeping with current legislative proposals) to their view that holding capital investments via partnerships does not affect whether a partial tax exemption is granted.
  • Unfortunately, the Circular leaves open important questions with regard to the taxation of Spezial-Investmentfonds.

1. Qualification of Investment Fund Income for Corporate Tax Purposes

The Circular clarifies that taxable business income for corporate tax purposes, tracking the rules applicable for trade tax purposes, exists at the fund level only if an Investment Fund engages in significant active entrepreneurial management of its assets.

Investment Funds are regarded as taxable entities for corporate and trade tax purposes. In fact, however, only certain income from domestic sources is taxable in Germany on the incoming fund side, in particular investment income, such as dividends from German portfolio companies.

Income from a commercial enterprise maintaining a permanent establishment or permanent representative in Germany is also taxable on the fund level. An express additional requirement for tax liability for trade tax purposes is that the Investment Fund "actively entrepreneurially manages to a significant extent" its assets.

Under these criteria – which are (likely) more generous than the generally applicable income tax provisions – activities that would, for example, constitute taxable business securities trading under general rules will not necessarily lead to the tax liability of an Investment Fund. What will be decisive for private equity funds will be whether involvement in the active management of portfolio companies occurs.

The clarification will make it easier for fund managers to obtain legal certainty in this important tax planning area, as the same standard now applies for the determination of both corporate tax and trade tax liability.

2. Tax Obligations of Investment Funds of Funds

Against the discernible tendency to seek to create consistent provisions for corporate tax and trade tax, the Circular contains divergent statements here on the treatment of investments by an Investment Fund in partnerships that are engaged in a trade or business for German tax purposes.

For trade tax purposes, the investment by an Investment Fund in a partnership that is actually engaged in a business activity or is "infected" with business status will not result in a taxation of the Investment Fund if the Investment Fund solely carries out advisory and control functions or exercises other administrative rights as a limited partner.

For corporate tax purposes, however, every investment in a partnership that is engaged in a trade or business for German tax purposes is to constitute an active entrepreneurial involvement that can potentially lead to tax liability of an Investment Fund.

This prompts a series of follow-up questions relevant for funds of funds, which it is to be hoped that the financial authorities will address.

3. Partial Tax Exemptions for Co-Entrepreneurships (Mitunternehmerschaften) / Partnerships

Investors in Investment Funds can under certain circumstances receive a partial tax exemption (Teilfreistellung) with regard to proceeds when an Investment Fund can be classified as an equity fund (Aktienfonds) or mixed fund (Mischfonds). A requirement is that the Investment Fund be generally obligated by its investment requirements to hold a specific proportion of it is assets in certain equity instruments, in particular interests in non-tax-exempt corporations, on an ongoing basis.

The specific rate of the partial tax exemption depends on the classification of an investor. If an investor is a natural person holding its investment interests as business property, or is a corporation, specific partial tax exemptions apply that are higher than the "general partial tax exemption" of 30% for equity funds and 15% for mixed funds.

Whether only the "general partial tax exemption" is applicable to partnerships in all cases was previously unclear. The Federal Ministry of Finance has now clarified in the Circular that the amount of the applicable partial tax exemption rate is based on the partners of partnerships, such that holding interests in Investment Funds via a partnership will not have detrimental effects on the amount of the partial tax exemption rate.

4. Documentation of Investment Limits

If an investment percentage in corporations is not fixed in the investment requirements of an Investment Fund, an investor can only obtain the benefits of partial tax exemptions by application in the assessment procedure and through documentation that the Investment Fund actually continuously exceeded the relevant corporate investment percentage throughout the fiscal year.

The documentation contemplated by the Circular is to include in particular asset lists and written confirmations by an Investment Fund. Annual and semi-annual reports will not be deemed sufficient by themselves.

From 1 January 2020 onward, such confirmations by Investment Funds are also to contain a list indicating the actually attained percentages for every business day of the relevant fiscal year. It is to be hoped that the financial authorities will further clarify the scope of this documentation requirement. In our view, the documentation requirement should also be satisfied in the absence of valuations on every business day by providing the applicable latest available valuations. Given the fact that private equity funds do not value investments on each business day, the documentation requirement simply cannot be met if a new valuation were to be required each business day. It remains to be seen what position the financial authorities will take in this regard.

5. Significant Obstacles to Partial Tax Exemptions for Fund of Funds Investors

The financial authorities are adhering to their view that holding capital investments via partnerships will not affect the granting of a partial tax exemption. This also corresponds to the contemplated statutory provision contained in the Draft Law on Additional Tax Promotions of Electro-Mobility and Revisions to Other Tax Provisions released in May. In our opinion, the consequence is a systemically inconsistent tax disadvantaging of funds of Investment Funds.

6. Open Questions for Spezial-Investmentfonds

The Circular does not yet address the provisions of §§ 25 ff. GITA on the taxation of Spezial-Investmentfonds. Important questions thus remain open, for example with regard to whether certain assets are permitted to be acquired pursuant to § 26 No. 4 GITA.

Under the final draft of the Circular, interests in closed-ended alternative investment funds (AIFs) are permitted to be acquired as securities if the AIF is subject to corporate governance and the legal body is subject to investor protection regulations. It is to be hoped that pressing application questions of this kind will also receive clarification through final circulars in the near future.

If you have any questions regarding the above points or in general in connection with the German Investment Tax Act, we are at your disposal at any time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions