German Government to Redraft Discriminatory Tax Legislation

Washington, DC, March 24, 2003 - The Institute supports action taken by the upper house of the German Parliament-rejecting tax legislation that would impose a tax on capital gains that presently are tax free, and would levy the tax in such a way that significantly favors investments in German funds over investments in non-German funds. Specifically, under the tax proposals, foreign funds would not be able to take advantage of the half-taxation method under which only 50 percent of the distributed capital gains would be taxed.

In an earlier comment letter, the Institute expressed its concerns with the proposed legislation, and noted that it might be contrary to European law because it constitutes a restriction on capital movements. The Institute urged the European Commission to take action before the law was scheduled to take effect.

Late last year, however, the lower house of the German Parliament passed the tax legislation.

To address the disagreement, the German government has announced its intention to draft a new law dealing with the taxation of investment funds, which will be considered by conciliation committees of the two houses of Parliament. Government sources state that this new tax legislation for investment funds should eliminate the existing discrimination against foreign funds with respect to the taxation of dividends by permitting only half of the equity dividend from foreign funds to be taxed (as currently is the case for domestic German funds). If the conciliation committees resolve the tax proposal impasse-and the new capital gains aspects are included-the German government intends to address the capital gains discrimination problem for foreign funds only under the new tax legislation for investment funds.

The draft of the new tax legislation for investment funds is not expected until the summer of 2003. In addition, under this timetable, it is unlikely that the UCITS legislation will be implemented in Germany by the deadline of August 2003 specified in the UCITS Directive.