German interest rate could boost your fund market shares

in Advisory, Industry Insights, Regulatory/Compliance, 17.02.2021

2020 was quite a year, bringing huge challenges to the asset management industry, and beyond. Now, here we are in 2021 and optimism is in the air…especially for German investors!

The story so far

Back in 2018, the German Investment Tax Act (GITA) was completely revamped. It lightened the complex tax reporting that funds (and therefore asset managers) were encouraged to provide to their German investors (through the publication of deemed distributed income (DDI) as per Article 5 Sec 1 of the GITA).

The new GITA (2018) introduced two main categories:

  1. Mutual funds considered as opaque
  2. Special investment funds considered as transparent

Under the opaque system, the fund can elect one of the five tax classifications (equity, mixed, other, German real estate and non-German real estate) meaning German investors can benefit from a partial-tax exemption on the following tax points:

  • dividend distribution
  • the realized capital gain upon redemption
  • the preliminary annual lump-sum calculation

The third point, which will determine the final lump-sum amount reported by each type of German investor, is representative of the forecasted annual estimated tax liability. It is calculated using (among other elements) the annual reference interest rate published every January by the German Ministry of Finance.

What’s changed this year?

In January 2021, the BMF issued a circular stating that the reference interest rate was negative: -0.45% for the whole 2021 calendar year as opposed to previous years:

2018                     0.87%

2019                     0.52%

2020                     0.07%

How does it affect your fund tax reporting scheme?

  1.  Although the realized capital gain and dividend distribution will continue to be subject to the withholding tax following the tax-exemption applicable to mixed equity and real-estate funds, the negative interest rate may impact the way asset managers determine their dividend distribution strategy of the funds. Indeed, if an asset manager projects the potential distributable income by comparing the income from an accounting and tax standpoint, the funds may opt to revisit their approach given that the preliminary lump sum of December 2021 will be nil.
  2. The preliminary lump sum is calculated early in January based on the reference tax rate issued the previous year. While the preliminary lump sum calculated in early 2021 won’t be impacted (as the rate applied was issued back in January 2020), the negative reference interest rate issued in January 2021 means that German investors investing into opaque funds will not suffer any tax burden derived from the preliminary lump sum raised in 2022.

Even though German investors will need to be informed of the above configuration, it will clearly ease the reporting burden as long as the reference interest rate is negative. We see this as a fantastic opportunity to strengthen sales presence in Germany and to the German market.

KPMG expertise

Want to know more about the German investor scene? Get in touch with our team of specialists! KPMG can help you provide the appropriate information to your German investors and support you with the review of your cross-border fund distribution strategy.

This article has been written together with Claire Kindig.