German Parliament Rejects Discriminatory Tax Law

Washington, DC, April 16, 2003 - The Institute strongly supports the German Parliament’s recent decision not to adopt tax provisions relating to capital gains of fund shares, which would have discriminated against foreign funds. In an earlier comment letter, the Institute expressed its concerns with the legislation, and noted that it might be contrary to European law because it constitutes a restriction on capital movements.

On April 11, 2003, the lower and upper houses of the German Parliament passed a revised tax bill that does not contain any provisions relating to the taxation of capital gains of funds and their investors.

An early version of the bill, would have taxed only 50 percent of domestic German funds’ capital gains, while foreign funds would have been taxed on all of the capital gains. In effect, the tax bill would have discriminated against foreign funds by not permitting them to take advantage of the half-taxation method under which only 50 percent of the capital gains would be taxed. The new tax law that passed does not contain these provisions and would retain the current tax-free status of capital gains for funds held for more than one year.

The German government has also announced its intention to address the discriminatory tax treatment of foreign funds’ dividends. A new law dealing with the taxation of investment funds, which will be part of the law implementing the amended UCITS Directive in Germany, is expected this summer. This tax legislation for investment funds should permit only half of the equity dividend from foreign funds to be taxed as currently is the case for domestic German funds.